A non-compete agreement is a contract between a company and an employee, barring the employee from “competing” with the company when he or she leaves the job.
What sometimes happens is that employees gain vital skills and experience only to leave the employer and go into their own competing businesses. Or they find employment with a competitor who will pay higher compensation. Non-competes have been used to deter workers from leaving the company. But in recent years, the status of non-compete agreements has been in play.
Common law issues with non-compete agreements
The Treasury Department estimates that about 18% of all workers in the U.S. are covered by non-compete agreements. But are they enforceable (i.e., can a company keep a former employee who signed a non-compete from working for a competitor or going into business for him/herself)?
Courts have usually been on the side of employees to make sure they are not barred from working. It’s usually up to the company to show that the terms of the agreement are reasonable (limited in time, location, and what constitutes competition) and that there was consideration (some benefit to the employee) in signing the agreement. So, it’s never been easy for employers to enforce agreements.
State law rules regarding non-compete agreements
Increasingly, states are restricting or barring entirely the use of non-compete agreements, especially for “low-wage” workers. Here’s a roundup of some recent legislation that may affect your business.
- California. Non-compete agreements cannot be enforced in this state.
- Idaho. Employers can have non-compete agreements with key employees, but they must be reasonable in duration, geographic area, and type of employment.
- Illinois. Employers cannot have a low-wage worker (someone earning less than $13 per hour) sign a non-compete agreement.
- Maine. Employers cannot have a worker earning an hourly wage at or below 300% of the federal poverty level. What’s more the worker must be given 3 days before signing an agreement and it cannot take effect before the employee has worked at least one year or 6 months after signing, whichever is later. The rule is effective on September 1, 2019.
- Massachusetts. Employers cannot have a non-compete agreement with a non-exempt employee (i.e., someone who is hourly and not in management). Where non-compete agreements can be used, they must be limited in scope (no more than a one-year term, reasonable geographic area). The rule applies to agreements entered into on or after October 1, 2018.
- New Hampshire. Employers cannot have a worker earning an hourly rate less than or equal to 200% of the federal minimum wage (which would be $14.50 at the present) sign a non-compete agreement. The rule is effective on September 1, 2019.
- Utah. Employers can have a non-compete agreement, but it can’t run longer than one year.
What’s your alternative?
While you may not want or be able to make an employee sign a non-compete agreement to keep him/her from working for a competitor or starting a competing business, you can still protect your company with a nondisclosure (or confidentiality) agreement. This type of contract bars employees from using a company’s confidential information, including customer lists, price lists, and other trade secrets and proprietary information, outside of the company. These agreements are enforceable in all states provided they are drafted properly.
Best practice: Have an employee sign a nondisclosure agreement when starting employment with you. Some companies include the agreement in their employee manual. Whether or not you do this, it’s a good idea to have the employee sign a separate statement acknowledging that he/she has read the confidentiality agreement and understands what it means. And be sure you have your agreement reviewed by an employment law attorney.
