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There are risks involved in non-compete agreements, which are often part of an employment contract, and employees and employers should be aware of them.
There are many legitimate reasons why an employer may want to include a non-compete agreement in an employee’s employment agreement. However, in other instances, an employee may not have special value to the employer, but the employee may be required to sign an agreement containing a non-compete because, simply, the employer required it.
Many employees assume that non-competition agreements are not enforceable. Not so fast.
Yes, it is true that non-competes are looked at carefully, and many courts look upon them with disfavor. After all, we encourage people to work and America has a proud history of people trying to better themselves and favoring competition. However, non-compete agreements are not, on their face, improper—certainly not in New York State—and employers may have good reasons for seeking to enforce them.
If contested, it is for a court to decide whether or not a non-compete will be enforced. The court will look to determine the reasonableness of the non-compete by looking at such things as whether it protects an employer’s legitimate interests, with respect to the scope of the agreement, the territory and the reach, the reason for the non-compete, and the consideration, if any, given to the employee in exchange for it. It is often difficult to predict how a court will rule.
(Employers should consider, strongly, including a provision allowing the court to modify a non-compete if it believes that it is overbroad, so that it still may be enforced, though to a lesser degree. Can this invite a court to draft its own provisions? Certainly. However, it can also eliminate the “all or nothing” risk when the court looks at a non-compete.)
For example, the court may look at the skills of the employee; is she an employee with unique skills, such as a designer of the employer’s products, who is well compensated for her talents? Is she a sales person who brought with her an existing client base that she had developed and cultivated over many years? Or is she a sales person who arrived at her employer with no client base and developed one based on the introductions and investment of her employer? Does the employee have special skills in marketing or sales? Has she been privy to the employer’s short and long-term strategic plans, which would make her valuable to a competitor? Or is she someone who could be selling or marketing anything?
It is not uncommon for some employers to insist that all employees sign a non-compete, no matter how junior the person is, and no matter how unreasonable the terms of the non-compete are. The employee may sign the agreement because they feel, correctly or incorrectly, that they do not have a choice. And because they believe—or hope—that it will never be enforced.
The employee may feel the weight of a non-compete when in the market for a new job. Often times, a prospective new employer may ask to see any existing agreement with the candidate’s current employer in order to make sure that hiring the candidate does not violate an existing agreement. After all, no employer wants to be subject to a lawsuit after hiring a new employee—especially considering they may have lost other good candidates as a result of their hire.
If the agreement is being looked at by the attorney of an employee, it can create a difficult issue for the attorney during negotiation. Thinking strategically, the attorney must weigh two options: on the one hand, the attorney may seek to make the non-compete as narrow as possible, so as to not preclude his client from obtaining future employment; on the other hand, the attorney will understand that the more overreaching the agreement, the less likely it will stand up in court.
The lesson to be learned from this is to assume nothing. A non-compete may not be enforceable—but then again, it may be. Where employers have a real need to include a non-compete in an employee’s agreement, they should draft it carefully to make sure that they are tailored to protect the employer’s legitimate interests and is reasonable, so that it is more likely to be enforced by a court. An employee being asked to sign a non-compete agreement may feel she does not have a choice in the matter, and would then have to make the business decision—a fair or, at times, unfair one—of whether to assume the risk and sign the agreement.
Bart J. Eagle
Attorney & Mediator
www.eagleadr.com
1700 Broadway, 41st Floor
New York, New York 10019
(212) 586-0052
