Protection and Restriction with Non-Compete Provisions
Overlook the importance of non-compete provisions for your employees at your business’ own peril.
Businesses often want to protect their interests by putting restrictions on their employees which come into effect when those employees leave the business. After all, small businesses as well as large corporations have interests which could be jeopardized by an employee’s actions after he or she leaves the company. A common scenario occurs when a former employee takes a new job that puts them in direct competition with their former employer. This can pose a variety of challenges to the former employer. For example, will the former employee seek to recruit the former employer’s clients or staff at the new position? Or, will that former employee attempt to use sensitive business information obtained while working for the former employer? Thankfully, there are ways a business can protect its interests in such situations. One form of protection is to have employees sign non-compete provisions in their employment agreements.
How do non-compete clauses work?
Non-compete clauses in employment agreements typically create obligations requiring the former employee to refrain from taking certain actions, or forbidding the former employee from taking a position that places the former employee in direct competition with their former employer. They can be drafted in a variety of ways, including limiting the amount of time before a former employee may work in the applicable field again, limiting the geographic area in which the former employee can work after leaving, and even restricting the field of work or clients that the former employee may work with generally.
Due to the fact that non-compete clauses may impede upon a person’s ability to work and make a living, courts routinely review non-compete provisions and closely examine the provisions if under dispute. As state law governs non-compete clauses, each state has its own procedure regarding how or whether to enforce non-compete provisions.
The NY Approach
In New York, the courts have settled on a three-part test to determine whether a non-compete clause meets their standard of enforceability. In general, New York courts will find a non-compete provision enforceable if it: (a) is no broader than required for the protection of the legitimate interest of the employer; (b) does not impose undue hardship on the employee; and (iii) is not injurious to the public. BDO Seidman v. Hirshberg, 93 N.Y. 2d 620 (2d Dep’t 1995). If the non-compete clause only meets one or two of the requirements, it may be unenforceable and struck down by a court. Therefore, it is highly recommended that you engage an attorney to draft and review any non-compete clauses in your employment agreements in New York.
The TN Approach
Tennessee takes a similar approach to New York, using a court-established test for the purpose of determining the reasonableness of the provision. Tennessee courts will consider the same three factors as New York, as well as whether or not the provision is supported by sufficient consideration (i.e. whether the employee received something of significant enough value – e.g. salary and/or stock – to support upholding the provision). If it is found that the non-compete provision satisfies these factors, courts in Tennessee will generally rule that the subject provision is valid and enforceable.
The CA Approach
California takes a different perspective on non-compete provisions. In California, businesses looking to include non-compete clauses in their employment agreements, and later enforce them, face a much steeper hill to climb. Section 16600 of the California Business and Professions Code says that, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Essentially, California has determined that the best interest of its citizens is to promote freedom of competition among former employees and former employers. However, California does offer limited exceptions to the strict default rule. The most prevalent exception is when a person sells the “goodwill of a business” or otherwise relinquishes their ownership interest in an entity. In such a scenario, a person may agree to refrain from conducting similar business to the one being sold, within a specific geographic area. Nevertheless, this exception to the general California rule applies only in very narrow circumstances.
Nevertheless, this exception to the general California rule applies only in very narrow circumstances, and California’s general custom against enforcing non-compete provisions remains limited at best.
Educate yourself and protect your business.
Wherever your business may be based, non-compete provisions are important for you to consider. Employers looking to include non-compete provisions in their employment agreements should always consult with an attorney before implementing them. Our firm often works with companies who are drafting non-compete provisions, as well as employees who are evaluating their rights under existing agreements.
Please do not hesitate to contact us at firstname.lastname@example.org if you have any questions or need assistance or help with a non-compete related issue.
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