Having employees sign non-compete agreements is smart business. After all, knowing what they know about your company, they could steal sales and clients from you if they quit and work for your competitors or start their own businesses. Thus, preventing them from turning into your direct competitor after they leave the company is a pretty good strategy. However, you need to design your non-compete agreement carefully, or your employees can get the court to invalidate it. Here are three ways this can happen.
The Terms Are Unreasonable
The top reason non-compete agreements are invalidated is because the terms are unreasonable. What's considered unreasonable varies between jurisdictions and from case to case. However, courts typically look at how much harm the contract clauses do to the employees and whether the potential damage to the business justifies it.
For example, an employee sued after she was fired for not signing a non-compete agreement because it didn't specify a geographical area and was to be effective for two years. Although she lost at trial court, the appellate court agreed with her stance, finding the agreement was unduly burdensome on the plaintiff, among other issues.
When designing your non-compete agreement, you need to make sure you're not preventing ex-employees from making a living or negatively impacting their careers beyond what is necessary to protect your business interests. Both the geographical area and the time limit the contract covers should align with the potential losses you stand to sustain if the employee works for a competitor or starts a business in the same field. If the risk is low, for instance, then the agreement should only last a few months or the geographical areas it pertains too should be small.
There's No Legitimate Business Reason
Another reason why non-compete agreements are invalidated is because there is no legitimate purpose for either the employee to sign it or for the contract to exist in the first place. This can happen in cases where the company has all employees sign the contract and tries to enforce it regardless of the employee's actual position and duties.
In the hairstyling industry, for instance, it's fairly commonplace for salons to have stylists sign non-compete agreements. Employers frequently state they're trying to prevent former employees from using proprietary styling techniques at other salons or to keep stylists from taking customers away. However, if those proprietary techniques don't exist or the only customers the stylist is likely to "steal" are the person's friends and family members, the courts may feel the reasoning behind the non-compete clause isn't legitimate enough and invalidate the contract.
You must take care to only use non-compete clauses when there is a real risk your business will be negatively impacted by an employee's departure and only have employees who have access to vital company information (e.g,. trade secrets) sign them. Otherwise, you risk wasting time and money defending an indefensible contract.
You Don't Offer Enough in Return
A third reason an ex-employee may be able to successfully invalidate a non-compete agreement is if you don't offer anything in return for them essentially giving up their rights. For instance, if the contract prohibits the employee from working for a competitor within a five-mile radius for up to two years, but you don't give the employee anything in return for the inconvenience of having to commute to another area to work or be unemployed for 24 months, then the courts may see this as an unfair exchange and let the employee break the contract.
If, on the other hand, you paid for the employee's industry training, then the court may feel the value of your investment justifies the terms of the clause.
Be sure that employees are getting a fair deal for what they are giving up when signing the non-compete agreement.
For help developing your non-compete contract or assistance with other business legal matters, consult a business litigation attorney.