Navigating the world of employment contracts can be daunting, especially when faced with terms like non-compete agreements or non-compete law. It is crucial for employees to understand what these agreements entail and when they are enforceable.
Non-compete agreements are contracts between an employer and an employee. The employer seeks to limit the employee’s ability to engage in similar employment within a specific geographic area for a specified period after leaving the company. These agreements protect a company’s competitive advantage, trade secrets, and proprietary information.
Recently, the enforceability of such agreements has come under scrutiny. Several U.S. states have started challenging their validity, rendering them unenforceable in certain situations. The argument is that these agreements may stifle competition and innovation by limiting employees’ ability to find new employment opportunities. The National Labor Relations Board (NLRB) has suggested that non-compete agreements are likely unenforceable unless narrowly tailored.
Narrowly tailored is a legal principle implying that a restriction must be specific and limited enough to achieve its objective without unnecessarily infringing individual rights. In the context of non-compete agreements, the restrictions imposed on the employee should not be more extensive than necessary to protect the employer’s legitimate business interests.
Here are some examples:
- Example 1: Consider a software engineer in the tech industry. This engineer works for a company developing proprietary software. The company requires the engineer to sign a non-compete agreement. This agreement prohibits the engineer from working for a direct competitor or starting a similar business within a specific geographic area for a certain period after leaving the company. The agreement may be enforceable if its scope is reasonable. An example of a reasonable scope could be a one-year restriction within the company’s city. The agreement also protects the company’s legitimate business interests, such as safeguarding trade secrets and proprietary information.
- Example 2: A doctor or dentist selling their practice may have to sign a non-compete agreement in the healthcare sector. This agreement prevents them from opening a new practice within a certain radius for a specific period. This agreement aims to protect the buyer’s investment in the practice. It also prevents the seller from immediately opening a competing practice nearby. Such an agreement can be enforceable. The condition for its enforceability is that the duration and geographic scope are reasonable and necessary to protect the buyer’s interests.
- Example 3: In the sales world, a sales executive with access to a company’s customer lists and pricing strategies may be asked to sign a non-compete agreement. This agreement may prevent the executive from working for a competitor or starting a similar business within a particular geographic area for a set period after leaving the company. This agreement becomes enforceable if the scope, including the duration and geographic restrictions, is reasonable. An example of a reasonable restriction could be a two-year restriction within the company’s state. The agreement protects the company’s legitimate business interests. These interests include maintaining customer relationships and preventing the misuse of confidential information.
What Makes a Non-Compete Agreement Enforceable?
Generally, three factors determine a non-compete agreement’s enforceability:
- Legitimate business interest: The employer must demonstrate a legitimate business interest protected by the non-compete agreement. This could include trade secrets, confidential business information, or customer relationships to which the employee had access during their employment.
- Reasonableness: The terms of the non-compete agreement must be reasonable in scope. The duration, geographic area, and extent of the restriction must not be overly broad or oppressive.
- Consideration: A legal benefit or promise must be given to the employee in exchange for agreeing to the non-compete. This could be in the form of employment, promotion, or special training.
Philadelphia Non-Compete Lawyers at The Gold Law Firm P.C. Can Help You Understand Your Business Rights
If you have questions about your non-compete agreement, speak with our Philadelphia non-compete lawyers at The Gold Law Firm P.C. today. Call us at 215-569-1999 or contact us online to schedule a free consultation. Located in Philadelphia and Pennsauken, New Jersey, we serve clients throughout South Jersey and Southeastern Pennsylvania, including Wilkes-Barre, Scranton, Northeast Philadelphia, Bucks County, Chester County, Delaware County, Lehigh County, and Montgomery County.
