Understanding Non Compete Agreements or Covenants Not to Compete
When starting a new job, an employee may be asked to sign a non-compete agreement (a.k.a. a covenant not to compete), especially in positions that have access to client relationships, trade secrets or sensitive business practices. A non-compete agreement takes effect when the employee leaves the company and it places limitations on the types of work he or she may seek. Many people mistakenly believe non-competes are not enforceable and therefore sign without carefully reviewing the contract. However, non-competes generally are enforceable in Pennsylvania if they pass three legal requirements:
- They must protect legitimate business interests;
- There must be adequate consideration; and
- They must be reasonable in scope (geography and duration).
Even if the non-compete does not meet these three requirements, it may have a chilling effect on the employee’s job search, as not only the employee but the new employer may be subject to legal action if found in violation of the contract. It is better to understand and potentially negotiate the terms at the start of the employment relationship so a new job search can begin with clear knowledge of what limitations are faced.
Depending on the employer, the employee, and the situation, the terms of the non-compete agreement may be negotiable. They can also be very tricky, so it may be prudent to have an attorney review the document and make suggestions.
Companies have the right to protect their business and workers have the right to earn a living. For example, if a key employee leaves to start her own rival company and takes with her other key employees and client lists, the original company may be severely and negatively impacted. A good non-compete protects businesses from having the rug swept out from under them. But some non-compete agreements go too far and impose restrictions far beyond what the company reasonably needs to protect its business interests.
A well drafted non-compete agreement tries to be fair to both parties, meeting the three requirements listed above. Let’s take a closer look.
The non-compete agreement must protect legitimate business interests.
The employer is entitled to protect confidential information, business secrets, good will, and important business relationships but this must be thoughtfully considered. Making the janitor who has no access to business secrets sign a non-compete may be questionable while asking a product developer who is working on a new product offering to sign one would be legitimate.
There must be adequate consideration.
The employee must be given something of value for promising not to engage in direct competition. At the beginning of the job, the employment itself is adequate consideration. But what if an employee is asked to sign a non-compete after having been with the company for a period of time? Then something else of value – such as a promotion or more compensation – must be offered.
The restrictions must be reasonable in scope (meaning the geographic area and timeframe must be reasonable).
Say the employer sells hammers in Western Pennsylvania. The employer creates a non-compete that says the employee cannot work for any company who sell hammers (even if the employee will be selling wrenches) anywhere in the U.S. for ten years. Pennsylvania courts would probably hold both the duration and the geographic scope to be unreasonable. However, if the agreement specifies the employee cannot sell hammers in Western Pennsylvania for a period of one year after leaving, Pennsylvania courts would probably uphold the restriction. The key is that the scope of the restriction should be tailored to the business interests being protected.
Both employers and employees should consider non-compete agreements carefully and critically. Employers should resist the temptation to use off-the-shelf forms. Employees must consider restrictions carefully as these restrictions may have long term career consequences. Both employers and employees should be aware that the terms of an agreement may be subject to some negotiation.