Rules To Follow: The Truth About Non-Compete Clauses

It’s easy to see why a business would want to have employees sign a non-compete agreement. They are used to limit the competition to the business from employees who have detailed and intimate knowledge of the company operations, procedures, customers, clients and access to the other employees. On top of that, a non-compete agreement will allow a business to assert control over a former employee after they leave the company, potentially for a while after they leave the company, and limit what opportunities the ex-employee is able to take advantage of. 

What exactly are non-compete agreements? Non-competes are contracts, typically between a business and its employees, governed by contract law with some specific laws that apply state by state regarding their enforceability. It’s a contract between an employee and an employer where the employee agrees not to enter into competition with the employer during and after employment. They prevent employees from entering into specific geographic markets or professions where they will be in competition with the employer. One thing to keep in mind if you’re a business owner and an employee has violated a non-compete is that, like other contracts, there is most likely a statute of limitations in your state for enforcing non-compete violations. You’ll have to act on the violation before the time limit of the statue runs out. 

There’s sometimes confusion among business owners as to non-compete agreements vs. non-disclosure agreements. Non-competes prevent employees from taking jobs or participating in activities that will compete with the company business. Non-disclosure agreements prevent employees from talking about or sharing confidential information or trade secrets that belong to the company. It’s common for a non-compete, non-disclosure and non-solicitation (they prevent employees from soliciting other employees and/or clients/customers to leave the business) to all be wrapped up into a single contract signed by employees. 

Like other contracts, non-compete agreements must generally be supported by valid consideration - meaning that the employee must receive something of value in exchange for the promise not to compete. Typically, a business would have an employee sign the non-compete agreement prior to employment, and the employment itself would be enough consideration for the employee making the promise not to compete. 

Not all states allow non-competes, some simply consider them to be unenforceable. Make sure to check for any state specific laws regarding non-competes if you’re considering having your employee sign one. For example, there is a Virginia non-compete law. As of July 1, 2020, Virginia employers are prohibited from entering into, enforcing, or threatening to enforce a non-compete agreement with “low wage” employees. Under Virginia Code  § 40.1-28.7:8 a low wage employee is a worker whose average weekly earnings during the preceding 52 weeks are less than the average weekly wage of the state. That’s currently somewhere around $63,000 per year. 

How Do Non-Competes Work? 

The key to non-competes being enforceable is reasonableness. Generally speaking, even states that allow non-competes disfavor them and do not hesitate to overturn them in situations where the terms of the agreement are considered to be unreasonable. Non-competes limit an employee's future employment options, and placing too many restrictions on that is considered bad public policy. It’s not uncommon for them to be overturned when challenged for reasonableness and coupled with the fact that several states flat out don’t allow them to be enforced, you'll need to carefully construct a non-compete in order to avoid enforcement issues. This is why businesses often hear from people who think non-compete agreements aren’t enforceable. 

What exactly do non-competes need to be reasonable on? The scope of time, geography and what exactly counts as a competing activity. 

• Time. The shorter the time frame or length of the agreement, the more likely it is that the non-compete will be considered reasonable. There’s no clear cut rule here as to what time period is reasonable, and it can vary greatly from jurisdiction to jurisdiction. Agreements that last for a year or two tend to be upheld and approved more than ones that extend beyond that. 
• Geographic Area. The geographic scope of the agreement has to be reasonable and limited to a region where any competition by the employee would truly interfere with and be detrimental to the business. How large a geographic area is reasonable will depend on the specifics of the industry and business. As an example, if you’re a local company operating in Richmond Virginia, with no clients or presence outside of the Richmond metro area, a non-compete that prohibits an employee from taking a competing job position anywhere in the United States would be unreasonable. 
• Competing Activity. What counts as competition and how competing activities are defined in the agreement must be reasonable as well. If it’s too broad then it is likely that the non-compete restrictions wouldn’t hold up. Employers are most likely to have success by prohibiting the employee from competing with a select list of direct competitors, or not taking well defined positions with other companies in the same industry and field. A general, broad description of what constitutes a competing activity isn’t going to work, you can’t just say that an employee is not allowed to take a job doing “sales” because that’s what the employee does for your business. 

To summarize, what voids a non-compete agreement? Unreasonableness in terms of geographic scope, length of the agreement and the description of what competing activities are. 

Here’s a list of the most common mistakes employers make when dealing with non-competes:

• It’s unenforceable because there was no consideration. This comes up when already hired employees are given non-competes without receiving anything of value in return. They’ve already got the job so they need something else, such as a raise or promotion as consideration for agreeing to the non-compete. 
• It’s unreasonable in terms of time, geographic scope and what competing activities are.
• Not regularly updating the agreement to reflect changes in the law, court decisions or best practices. 
• Not being in compliance with the laws of your jurisdiction regarding non-competes. 
• Thinking that a non-compete agreement is all that you need to protect yourself. There are several other documents and policies you should have in place when it comes to employees. The non-compete is just one tool at your disposal to help protect the business. 

Have questions about non-competes, or how to protect your business in general? Contact us for a free consultation.