Picture this: Your favorite team drafts the top-ranked rookie right out of college. The team spends months training them, molding them into an MVP-level talent.
Then, right before the first game of the season, the team’s rival offers the rookie a brand-new contract, doubling their salary. Armed with all new skills, they pack up and join the enemy. Now, your team not only lost a vital and talented player, but also all the time, money, and energy expended to train them. Not to mention, now the rivals know your team’s entire playbook.
Companies, like sports teams, know that good teammates are not always easy to come by. Employees, like players, are an investment.
With people leaving jobs every few years, how does a company prevent skilled employees and critical business information from falling into the hands of their competitors?
Non-compete agreements (“NCAs”) are contracts between an employee (or prospective employee) and an employer. In short, the employee’s agreeing to limit where and how they work in the future, in the event they leave their job.
Let’s take an example: Tiny Dog Hats, Inc. (“TDH” for short) hires Julie, a new salesperson, for their New York City office. Her job is to reach out to residents (and their dogs) of NYC and sell hats. Before she can officially join, though, Julie is required to sign an NCA stating that, if she leaves her position, she will not work for any other dog hat sales companies in the greater NYC area for two years afterwards and promises not to take their sales or client lists with her when she leaves.
In this instance, Julie gets a chance to work with the most prestigious tiny dog hat sales company in the nation, but the company’s also protected if and when she chooses to move on.
NCAs can be used to protect against the loss of key employees, customer lists, price lists, customer relationships, confidential information, or even trade secrets. They give companies a bit of peace-of-mind to invest in training employees and provide them access to important information.
So, What Do NCAs Mean for Employees?
From a company’s perspective, an NCA makes sense for protecting company assets. For employees, signing an NCA usually has less obvious benefits, however, signing can be a prerequisite for obtaining certain jobs. Sometimes companies will create additional incentives for the employee to sign, such as a signing bonus or increased compensation, but this is more the exception than the rule.
Generally, even where companies feel an NCA is necessary, these agreements rarely negatively affect employees. However, there are times when they can create problems.
It’s important to note that companies, not employees, tend to hold most of the leverage in hiring situations, particularly with entry-level or highly coveted positions. Sometimes, employees feel pressured into signing an agreement; other times they just don’t read what they sign.
In either event, it’s crucial to know what you’re getting into when signing a binding contract. Not only can NCAs impact your career down the road, it can even subject you to legal action if you violate the terms—even accidentally.
In light of this, it’s recommended that employers and employees alike consult an attorney for any issues or questions that may arise.
Are NCAs Legit?
Unfortunately, the answer to this question isn’t exactly black and white.
California, Oklahoma, and North Dakota have made it simple for employees by banning NCAs outright.
However, the vast majority of states have not banned NCAs. It’s up to the courts in those states to decide if an agreement is fair or not. They evaluate each NCA through a balancing test to see if the terms of the agreement are reasonable and whether it should be upheld or voided. This balancing test is usually comprised of three factors (although the exact test can vary state to state).
First, a court looks to see if the NCA was created to protect an employer’s legitimate business interest(s).
If we take our Tiny Dog Hats example from earlier, TDH is looking to protect their confidential customer lists and relationships with clients to keep improving sales. Improving sales would very likely be a legitimate business interest. On the other hand, If TDH had Julie sign the NCA just because they want her career to take a nosedive, the NCA would not likely stand up.
Second, the NCA must not impose undue hardship on the employee.
To go back to Julie, if she were to leave her job, she would not be able to work for another dog hat sales company in the greater New York City area for two years after she left, meaning she could still get a job as long as it’s outside of NYC. Or, she could get a job in NYC selling something else.
Since Julie has options, its likely this NCA wouldn’t be incredibly burdensome for her. On the other hand, if the NCA said she couldn’t work for any company that sells anything, anywhere in the United States, for the next 20 years, there might be a few issues.
Lastly, the NCA can’t actively harm the public or prevent them from receiving a benefit or service.
Let’s assume (correctly) that tiny dog hats are a necessity for all dog-owning New Yorkers. If the NCA prevented them from acquiring this vital accessory, it’s likely a court would step in.
What Should I Look Out For? What Would Happen if I Break One?
The issue with evaluating NCAs is that each one is different. Certain items may raise red flags, such as excessive time or geographic restrictions. Mainly, it needs to be fair for both parties.
However, we do know that the repercussions of breaking an NCA can be substantial, ranging from reputational damage to issues with future employers and even expensive lawsuits. Because the stakes are so high, you should consult with a local attorney for guidance.
An experienced attorney can help break down whether the terms of an NCA are fair, whether the terms can be negotiated (or re-negotiated), as well as lay out what an employee can do to make sure they don’t run afoul of the terms. And remember, each state has different rules on NCAs, so what’s allowed in one state might be completely illegal in another.
Like it or not, employees or prospective employees may not have a lot of leverage when it comes to NCAs. But, overall, knowing what it entails and what it means for them down the road can help employees make smart, informed decisions about signing one.
The materials in this article are for general informational purposes only and not for the purpose of providing legal advice or any other purpose. You should contact an attorney to obtain advice with respect to any particular issue or problem. Use of and access to this article do not create an attorney-client relationship between Kinney Lisovicz Reilly & Wolff and the user or browser.
Photo of person signing document courtesy of Westend61/Getty Images.
Nicholas J. Guarino is an associate with the firm Kinney Lisovicz Reilly & Wolff. Nick practices primarily in the areas of insurance coverage and commercial litigation. For questions, reach out to him at nicholas(dot)guarino(at)klrw.law. Follow Kinney Lisovicz Reilly & Wolf on Facebook, Twitter, and LinkedIn.More from this Author