Non-Compete Agreements: Protecting Your Work And Your Small Business
Michael Levenson October 18, 2016
Nearly everyone switches jobs during their career. This is especially true in the IT industry where staff often move from one employer to another. That is why non-compete agreements are such valuable tools for companies looking to protect their business interests.
Non-compete agreements are contracts that prohibit employees from going to work for a rival employer within a certain period or from working in a certain area after leaving your company. They may also prohibit the employee from stealing clients and sensitive data.
The main rationale for non-compete agreements is to encourage innovation by preventing workers with “trade secrets” from transferring technical and intellectual property of companies to rival firms, and to protect the company from the loss of clients.
Limitations On Non-Compete Agreements
While non-compete agreements can be a great tool for employers, there are limits on how they can be used. Each state has its own rules for non-compete agreements and some even disallow them entirely.
For example, in New York, non-compete agreements are unenforceable when the employee was terminated without good cause. In California, most non-compete agreements are completely void.
In New Jersey, non-compete agreements are valid as long as they meet certain requirements. New Jersey courts require that non-compete agreements:
- Protect the legitimate interests of the employer;
- Not impose an undue hardship on the employee; and
- Not be injurious to the public.
According to New Jersey law, an employer cannot prevent all competition. However, a business does have a legitimate interest in protecting trade secrets, confidential information and client relationships. This means that if an employer hires an employee to develop customer relationships, that employer may seek to restrain the employer from leaving and soliciting the same customer relationships that were developed on the employer’s dime by requiring the employee to execute a non-compete agreement. The employer can also prevent an employee from taking confidential and proprietary information to another company. New Jersey courts have found such restrictions reasonable and worthy of protection.
What A Non-Compete Agreement Cannot Do
To judge if a non-compete poses an undue hardship on the employee, courts look at the likelihood that the employee will find work in his field even with the non-compete, the burden on the employee by the geographic area proscribed by the agreement, the subject matter of the agreement, and the duration of the agreement.
For example, a non-compete agreement may state that a former employee is prohibited from soliciting company clients in Middlesex County for 2 years. If the former employee breaches the agreement and a lawsuit is brought, the court will look to the aforementioned factors to determine if the restraints are reasonable. Each case is determined based on its specific facts.
The court has the power to change or invalidate any non-compete agreement that is deemed too restrictive. For example, if an IT company’s non-compete restriction prohibits a former employee from working in a 30-mile radius, the court can shrink that radius if it finds there are a shortage of IT professionals within that area.
Who Do Non-Compete Agreements Apply To?
Non-compete agreements are more likely to be enforced against higher-ranking employees with more access to confidential information. The “higher up” the employee, the more likely it is that the non-compete agreement will be enforced. For example, a CFO with access to sensitive company data is more likely to have a non-compete agreement enforced against them than an entry-level employee.
Like any contract, non-compete agreements must be supported by “consideration.” This can be anything given by the employer in exchange for the non-compete agreement. An offer of employment will usually satisfy this requirement. Therefore, it is often best to have the employee sign the non-compete upon their initial hiring.
For informational purposes, you can download a sample non-compete agreement by clicking here. If you have any questions, it is best to speak with an experienced employment law attorney who can specifically address your needs.
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About The Author
Michael Levenson has extensive experience working for insurance companies and in the health care field. Prior to joining InsureYourCompany.com, Michael was an attorney with one of the largest insurance defense firms in the country where he specialized in health care law and previously served as the judicial law clerk to a judge presiding in the New Jersey State Superior Court.
Mr. Levenson earned his Juris Doctor degree from Albany Law School with honors. While in law school, he served as a Constitutional Law Teaching Fellow and worked at Albany Law School’s Civil Rights and Disabilities Law Clinic, where he dealt with a myriad of health care law issues.