Non-compete clauses, or covenants not to compete, have been in the news. New laws out of Massachusetts and Hawaii, both passed only a month ago, have changed the legal landscape when it comes to these clauses. Bizarre uses like Trump forcing his volunteers to sign non-compete clauses, barring them from volunteering for any other candidate until he decides he isn’t interested in running for president anymore, has brought them back to the forefront of the public consciousness.
Non-compete clauses are contractual agreements which generally prevent employees from working in a position competing with their employer both while they work for them and for a preset period after they leave the position. Critics of these clauses often cite instances of people being locked out of the industry they specialize in for years at a time. They also point to situations where lower paid positions, such as line-cook and janitorial positions, inexplicably including such provisions.
There are real business concerns that lead employers to use non-compete clauses. They want to ensure stability by motivating an employee to stay with their company. They also worry that employees may take their client lists and business methods and use them to set up shop against their former employers. For these reasons, non-compete clauses are extremely common in employment agreements.
However, it’s pretty easy to see how such agreements could be abusive for an employee. Locking a worker out of the industry they worked hard to specialize in, often for years, is a serious blow to a career. Binding an employee whose leaving poses no real risk to your company, such as a sandwich maker, only serves as a threat to prevent that worker from quitting.
These clauses have seen abuses and overreaching terms. Trump’s non-compete clause even requires his volunteers to force their employees to only volunteer for Trump. This is likely not enforceable, as forcing your employees to work with your choice of political candidate is a big no-no, but shows how far these clauses can go.
These clauses are enforceable, to at least some degree, in every state but one. However, each state has its own laws to deal with such contracts. In order to truly understand these clauses, it is important to understand both the general approach nationwide and some of the specific law state-to-state.
How Non-Compete Clauses Are Generally Approached
In theory, courts across the nation look with disfavor on non-compete clauses as being counter to public policy. In reality, these clauses are widespread and courts in almost every state will enforce them so long as they do not go too far. In order to show a court that a term doesn’t go too far, most states require legitimate business reasons for the term, evidence that the employee is getting something in return for the term, and terms must be reasonable.
In order to show legitimate business motivations, the employer must show that the term isn’t just to punish employees for leaving the company. The clause must be applied to an employee that poses an actual risk to the company, such as exposing business secrets.
Showing benefit for the employee fulfills a requirement that every contract must have known as consideration—a rule requiring that both sides have some benefit before a contract is enforceable. If the non-compete clause is part of an original job offer, most states treat the employment itself as sufficient consideration. However, if an employer is asking the employee to sign such an agreement after they’re already hired, the employees continued employment is generally not sufficient consideration. The employer usually must sweeten the deal with something like a promotion or a raise in return. This being said, there are a few exceptions. Kentucky has ruled that continued employment is sufficient consideration to support a non-compete clause. Illinois has said that continued employment can support such a clause, but only if there is a guarantee of at least two more years of employment.
The terms of the non-compete clause must be reasonable in duration, geographic area, and the scope of work the employee is barred from. Exactly what is reasonable depends on your state; there is no fixed rule. However, for duration, courts are skeptical of agreements lasting more than 6 months to 2 years. The geographic area shouldn’t expand beyond where the employer works or where their actual competitors work. The clause must also only bar the employee from working in the actual industry of the employer and the actual capacity they have served their employer in.
Massachusetts’ New Non-Compete Reforms
Massachusetts recent law is the one of the most in-depth, substantial reforms to how a state approaches non-compete clauses in years. The law refuses to enforce clauses longer than 12 months unless the employee has stolen from their employer or breached a duty they owe their employer—in this case the clause can last for 2 years. The clauses must also be in writing and signed after giving the employee the opportunity to consult a lawyer.
Perhaps most controversially, the reforms require employees to provide their employees something called “garden leave.” This originally required companies to pay ex-employees half of their usual pay for the duration of the non-compete clause. Now, they have the to provide their employee garden leave or “mutually agreed upon consideration.” In order to qualify as a substitute for garden leave, the clause must offer benefits equivalent to what would be provided under the original garden leave provisions.
Competitive California
California is the only state that bans non-compete clauses altogether. The success of the tech sector in CA is often attributed to this ban—creating an extremely competitive market for talent. The thought is that this competition attracts the best of the best.
California is serious about this ban. Multistate employers have tried to circumvent California law by having their contracts include a choice of law clause-normally enforceable—naming the law of another state. California decided this was silly semantics, and still refuses to enforce the clauses on employees in California regardless of choice of law provisions.
As strong as it is, there are a few exceptions to this blanket ban. If you’re selling ownership interest in a business an agreement not to open a similar business in the same area as your old one can be enforceable—so long as the restriction is for a reasonable period of time after the sale.
Hawaii Takes a Page Out of California’s Book
Just last month, after seeing California’s burgeoning tech industry, Hawaii introduced brand new rules reforming non-compete clauses within their state. The law specifically voids non-compete and non-solicitation agreements (agreements not to target a business’ clients after leaving the business) within any technology-related business.
How to Approach Non-Compete Clauses
It is worth emphasizing, the exact details of how a state deals with non-compete law can vary drastically state-to-state. This article has only dealt with the most substantial departures from the general approach. What’s more, the Supreme Court has refused to review cases dealing with non-compete clauses as recently as 2013, so it seems likely that these clauses will continue to be handled by the existing patchwork of state law.
Authored by Jonathan Lurie, LegalMatch Legal Writer and Attorney at Law
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