Non-compete agreements are contracts that restrict employees from working for competitors or starting their own competing businesses for a certain period of time after leaving their current employer. The purpose of non-competes is to protect the employer’s trade secrets and customer relationships, but they can also limit job mobility and entrepreneurship for employees. Whether non-competes are enforceable depends on the agreement’s specific terms, as well as the laws and court rulings in the jurisdiction where the agreement is being challenged.
In general, non-compete agreements are more likely to be enforceable if they are reasonable in scope, duration, and geographic area. For example, a non-compete that prohibits an employee from working in the same industry for five years worldwide would likely be deemed overly broad and unenforceable. On the other hand, a non-compete that only applies to a specific type of work in a limited geographic area for a reasonable period of time, such as one year, might be upheld in court.
Another factor that can impact the enforceability of non-competes is the employer’s legitimate business interest. Courts generally recognize that employers have a legitimate interest in protecting their trade secrets, confidential information, customer relationships, and goodwill. Therefore, non-competes that are narrowly tailored to protect these interests are more likely to be enforced. However, non-competes that are designed to simply prevent competition or restrict employee mobility are less likely to be enforced.
In addition to the scope and legitimate business interest, the enforceability of non-competes also depends on the state law where the agreement is being challenged. Some states, such as California, have a strong public policy against non-competes and generally do not enforce them, except in limited circumstances such as the sale of a business or dissolution of a partnership. Other states, such as Texas, allow non-competes as long as they meet certain requirements, such as being reasonable in scope and duration.
Even in states that allow non-competes, there are often limits on their enforceability. For example, in Illinois, non-competes are only enforceable against employees who earn more than $75,000 per year or are considered to be professional or managerial employees. In New York, non-competes are only enforceable if they are narrowly tailored to protect the employer’s legitimate business interests, and do not impose undue hardship on the employee.
There are also some types of employment where non-competes are generally not enforceable, such as for low-wage workers or those in highly mobile industries like technology. In these cases, courts may find that the non-compete is overly burdensome and restricts the employee’s ability to find gainful employment.
In recent years, there has been a growing trend towards limiting the use of non-competes, particularly for low-wage workers. Some states have passed laws that restrict the use of non-competes, while others have proposed legislation to do so. For example, in 2020, Illinois passed a law that prohibits non-competes for workers earning less than $75,000 per year, while California has a law that prohibits non-competes for most workers.
Overall, the enforceability of non-compete agreements depends on a variety of factors, including the scope and duration of the agreement, the legitimate business interest of the employer, and the state law where the agreement is being challenged. While non-competes can be a useful tool for employers to protect their business interests, they can also limit employee mobility and entrepreneurship. As such, it is vital for both employers and employees to carefully consider the terms of any non-compete agreement before signing and to seek legal advice if necessary. Speak with us today to review your non-compete agreement and ensure it is as protective as possible.