Tuesday, November 25, 2014

Non-Compete Agreements: What You Need to Know

It seems like it has become standard practice for an employer to ask a departing employee to sign a non-compete agreement. With the increasing use of email, cell phones, and social media, it is cheaper and easier than ever for an employee to compete against his former employer. As a result, employers frequently seek out non-compete agreements to protect their livelihoods. A non-compete agreement is a contract between an employer and employee in which the employee promises that, upon leaving the employer, he will not compete with it. For example, under a typical non-compete agreement, an employee will promise to refrain from engaging in the same business as the employer within the geographic area in which the employee operates for a certain period of time, usually two or three years. Employers have good reason to require departing employees to sign non-compete agreements: they have invested time, effort, and money into obtaining clients, and do not want to risk losing these clients to departing employees.

However, drafting an enforceable non-compete agreement is tricky. Non-compete agreements are disfavored by courts, as they are worried that these agreements will make it hard for departing employees to earn a living while unfairly depriving the public of their services. Courts will only enforce non-compete agreements that are drafted narrowly to protect an important interest of the employer while not making it too difficult for the employee to earn a living. The geographic scope must be limited to the area where an employer does most of its business. Non-compete agreements that extend beyond this area will not be enforced. For example, Illinois courts will not enforce a non-compete agreement that prevents an employee from competing against the employer anywhere in the state.

Moreover, the non-compete agreement must last for a reasonable period of time. Agreements that last indefinitely will probably not be enforced. In fact, courts are skeptical of agreements lasting longer than five years, and will only enforce them if the employer can show a good reason why the agreement needs to last for that period of time. Ideally, a non-compete agreement should last no more than two or three years.

Furthermore, an employer must give an employee something in return for signing the non-compete agreement. For example, it can be a condition of hire, or given in exchange for severance pay or benefits.

Courts will ultimately decide whether a non-compete agreement is enforceable based on the hardship it imposes on the employee versus the employer’s need for the agreement. An agreement that makes it impossible for the employee to gain meaningful work will almost certainly not be enforced. In fact, an employer will likely need to show how the non-compete is reasonable under the circumstances in order for it to be enforced. Therefore, when drafting non-compete agreement, an employer should explain to the employee the need for the agreement, and make sure that the employee is not completely precluded from finding work after leaving the employer.

If a non-compete agreement is found to be unenforceable, employers often ask courts to reform, or rewrite, it to make it enforceable. However, courts will almost never do this. Courts do not want to encourage employers to draft non-compete agreements that are overly broad with the knowledge that the court will narrow it in the event that it is unenforceable. Therefore, once a non-compete is found void, there is very little an employer can do to revive it.

Drafting a non-compete agreement is tricky. It must be limited in geographic scope and time, while providing the employee some benefit in exchange for signing it. Above all, it cannot be unduly harsh on the employee. With so many factors at play, drafting an enforceable non-compete agreement requires the assistance of a competent, experienced attorney.  The labor and employment attorneys at Ancel Glink are experienced in both attacking and defending non-compete agreements. Contact Margaret Kostopulos, Matt DiCianni or any of the labor and employment attorneys at Ancel Glink for assistance in these matters.