Non-Compete Agreements: When Are They Appropriate?

Non-compete agreements are a common part of employment contracts, but they can be confusing and restrictive. This blog post explains what non-compete agreements are, when they're appropriate, and when they're not. It also provides tips for employees who are considering signing a non-compete agreement.

Q + ALAWS

Graham Settleman

11/30/20233 min read

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What is a Non-Compete Agreement?

A non-compete agreement is a contract between an employer and an employee that prohibits the employee from working for a competitor or starting a competing business for a certain period of time after their employment ends. Non-compete agreements are typically used to protect a company's trade secrets, confidential information, and customer relationships.

When is a Non-Compete Agreement Appropriate?

Non-compete agreements can be appropriate in certain situations, such as:

When an employee has access to sensitive trade secrets or confidential information, such as customer lists, marketing plans, or proprietary formulas.
When an employee is in a high-level position and has the ability to damage the company's reputation or relationships with customers and suppliers if they were to go to work for a competitor.
When an employee is given specialised training or education at the company's expense.

When is a Non-Compete Agreement Inappropriate?

Non-compete agreements can be inappropriate in certain situations, such as:

When the employee is in a low-wage or non-specialized position.
When the non-compete agreement is too broad or restrictive, and prevents the employee from finding comparable employment.
When the employee is not given adequate consideration for signing the non-compete agreement, such as a bonus or promotion.
When the non-compete agreement is being used to stifle competition or prevent innovation.

Enforceability of Non-Compete Agreements

The enforceability of non-compete agreements varies from state to state. In some states, non-compete agreements are presumed to be unenforceable unless the employer can show that the agreement is necessary to protect its legitimate business interests. In other states, non-compete agreements are presumed to be enforceable unless the employee can show that the agreement is unreasonable or unfair.

Factors Considered by Courts When Determining Enforceability of Non-Compete Agreements

When determining whether a non-compete agreement is enforceable, courts typically consider the following factors:

The scope of the restriction: Is the non-compete agreement too broad or restrictive? Does it prevent the employee from finding comparable employment?
The duration of the restriction: Is the non-compete agreement in effect for a reasonable period of time?
The geographic scope of the restriction: Is the non-compete agreement in effect in a reasonable geographic area?
The consideration given to the employee: Was the employee given adequate consideration for signing the non-compete agreement?
The employee's position with the company: Was the employee in a high-level position with access to sensitive trade secrets or confidential information?

Tips for Employees Considering Signing a Non-Compete Agreement

Before signing a non-compete agreement, employees should carefully consider the following:

Is the non-compete agreement necessary to protect the company's legitimate business interests?
Is the non-compete agreement reasonable in terms of its scope, duration, and geographic reach?
Am I being given adequate consideration for signing the non-compete agreement?
Will the non-compete agreement prevent me from finding comparable employment after I leave the company?

If an employee is unsure about whether or not to sign a non-compete agreement, they should consult with an employment attorney.

Conclusion

Non-compete agreements can be a valuable tool for businesses to protect their trade secrets and confidential information. However, it is important to use non-compete agreements carefully and to ensure that they are reasonable and enforceable. Employees should also carefully consider the terms of a non-compete agreement before signing it.

Additional Considerations

In recent years, there has been growing concern about the overuse of non-compete agreements, particularly in low-wage industries. Some critics argue that non-compete agreements stifle competition and prevent workers from improving their wages and working conditions.

In response to these concerns, some states have enacted laws that restrict the use of non-compete agreements. For example, California has a law that prohibits non-compete agreements for employees who earn less than $70,000 per year.

Employees should be aware of the laws in their state governing non-compete agreements before signing one.

Examples

Here are some examples of situations where a non-compete agreement might be appropriate:

A software engineer at a tech startup who has access to proprietary code and trade secrets.
A sales executive at a pharmaceutical company who has a deep knowledge of the company's customer base

Here are some more examples of situations where a non-compete agreement might be appropriate:

A doctor who specialises in a rare medical condition and has access to confidential patient information.
A lawyer who works on mergers and acquisitions and has access to sensitive financial information.
A financial advisor who manages the investments of high-net-worth clients.
A restaurant chef who develops unique recipes and cooking techniques.
A fashion designer who creates custom clothing for celebrities and other high-profile clients.

In all of these cases, the employee has access to valuable information or expertise that could be damaging to the company if they were to go to work for a competitor.

Here are some examples of situations where a non-compete agreement might be inappropriate:

A cashier at a grocery store.
A customer service representative at a call centre.
A warehouse worker at a manufacturing plant.
A barista at a coffee shop.
A sales clerk at a retail store.

In these cases, the employee does not have access to sensitive information or expertise that would be valuable to a competitor. Additionally, non-compete agreements in low-wage industries can make it difficult for workers to find new jobs and improve their wages and working conditions.