How to Win at Non-Compete Agreements
Imagine you are a gourmet chef at one of the poshest restaurants in town. After several years, you decide to accept a job offer as the master chef at the newest eatery on Restaurant Row.
And then you can’t.
Your current employer has tethered you to her via a legal construct called a “non-compete agreement,” which can be stickier than frying eggs without Teflon.
Non-compete clauses are becoming the new black in today’s world of movers and job-hoppers.
As an employee, you don’t want to rock the boat (or not be hired). As an employer, you don’t want to watch your star salesman take dozens of lucrative accounts out the door and into a competitor’s claws.
How should you negotiate through these legal landmines?
Defining the Problem
According to Alan R. Boynton Jr. and Andrew R. Levy of McNees, Wallace & Nurick, LLC, in Harrisburg, a non-compete clause is a type of restrictive covenant. Non-solicitation and confidentiality agreements are others.
Non-solicitation agreements, which seem to be more prevalent in the Harrisburg region, limit an employee’s ability to sell to certain customers.
Non-compete clauses limit an employee’s ability to work for certain individuals or companies.
A confidentiality clause limits the information an employee can use or share with others.
Non-compete clauses are more common in certain fields, such as financial services and insurance, sales, and high-tech companies, according to Levy and Boynton.
The agreements can even be enforced in media markets, banning, for example, an anchorwoman from working on-air at another TV station for two years. Or a hairstylist with a large client base may not be able to set up shop next door to her former salon.
While such agreements were once used only for high-ranking executives or workers holding trade secrets, they are now popping up in some lower-wage, service-industry jobs.
So Long, Longevity
In this day and age, Americans are a highly mobile force. Like professional pinballs, workers—and especially younger workers—often careen from job to job and place to place.
Today’s average worker stays at each of his or her jobs for 4.4 years, according to the most recent available data from the Bureau of Labor Statistics. Not surprisingly, the expected tenure of the workforce’s youngest employees is about half that.
Levy notes that in a bad economy, employees tend to stay in their current job, but career moves grow as the economy recovers.
The law relating to enforcement of non-competes varies widely from state to state. Some states have laws that ban non-competes altogether or they more strictly limit geographic, market, or time restrictions.
According to the McNees attorneys, the key to enforcing agreements in Pennsylvania is for businesses to prove that the agreement was signed at the time of hire, or is otherwise supported by consideration, and that they have a legitimate business reason for restricting the employment of its workers.
“Limiting someone’s right to earn a living is generally frowned upon by the courts, but the restrictions can be enforced it if they are reasonable and supported by consideration,” Levy said. “If an employer goes overboard, it probably will not be enforced.”
11 Tips for Employers:
- When hiring, give your employees notice of the non-compete. The agreement should be part of the offer letter, Boynton and Levy emphasize. The offer letter should specify that the job offer is contingent upon signing a restrictive covenant agreement.
- Tailor the limitation to the current job. If you hire a software designer at Microsoft, you cannot say they cannot work for any competitor, even in a job that has nothing to do with software design.
- Don’t make the restriction too long or overly broad geographically. Levy and Boynton said that two years is “pretty standard” for non-competes clauses, though in the world of high-tech, six months to a year is generally considered more reasonable.
- Give adequate consideration. Consideration is an exchange of benefits or promises, Boynton explained. A boss cannot order a longtime employee to suddenly sign a non-compete without giving something in return, such as a raise. Continued at-will employment is usually insufficient consideration in Pennsylvania.
- Remember that agreements in certain fields deemed necessary to the public are more difficult to enforce than others. Non-compete clauses in the medical field are difficult to enforce, for example, because courts have generally recognized a “countervailing need for service,” Boynton said.
- On the medical side, agreements may often have monetary post-employment remedies. A departing doctor may be allowed to compete but only if she pays to the prior employer a year of her salary. The more painful the penalty, the more likely that employee may reconsider competing.
- The reason why an employee leaves can be a factor in whether a non-compete agreement is enforceable. If an employee is fired for poor performance, it may be hard to enforce post-employment restrictions because the worker won’t be seen as much of a threat.
- Avoid using standard non-compete agreements, since they may not be tailored to a particular job or industry and are therefore difficult to enforce. Also, periodically review existing non-competes or, if you don’t have any, consider whether you need them.
- Barring solicitation of customers by a former employee is routinely enforced. Proof of improper solicitation can be obtained from a forensic review of computers, and other sources prove solicitation of customers via advertising and social media.
- When you hire a new employee, examine their non-competes. Honor the prior employer’s legitimate business interests. That employee may not be able to work with their former clients.
- If someone violates the agreement, first remind them of the restriction, then issue a cease-and-desist letter, and then, as a last resort, you may move toward enforcement in the courts.
3 Tips for Employees:
- Know your rights and be prepared going into a new job. Consult a lawyer if need be. Some areas can be negotiated. Often attorneys may look to minimize the restriction, such as taking out the non-compete clause but leaving in the non-solicitation or allowing for attorneys’ fees.
- If you signed a non-compete in the past and are now out of work, be up-front with any new employer.
- Ask for confirmation from your former employer that the agreement would not be enforced. “I want to work for company X,” the letter should say. “I am seeking confirmation that it would not violate my non-compete agreement.”
While no one wants to think about their exit strategy when they start a new job, a wrong move could cost you dearly. Look before you leap, and read before you sign. BW
Alan R. Boynton Jr. chairs McNees Wallace & Nurick’s Injunction Group and regularly handles enforcement actions on behalf of companies relating to trademark, copyright, trade secret, contract, non-competition, and other business disputes. Andrew R. Levy is a member of the firm’s Labor and Employment Group and counsels employers on a full range of labor and employment compliance issues. For more information, email Boynton at firstname.lastname@example.org or Levy at email@example.com. www.mwn.com