You Can't Compete With Me The...Legality of Non-Compete Agreements
April 7th, 2011 | Michael Helfand
Millions of Americans wake up every day, get dressed in business attire, and head to work- only their “job” these days is actually looking for one. Unemployment rates are still hovering around 9.6% nationally, making this job market highly competitive and hard to crack into. Employers know this, and in a lot of ways, the sheer volume of applicants per job gives them the ability to exclude benefits, cut salaries and make demands that are sometimes not only unfair, but illegal.
One such demand that employers are placing on new-hires is that they sign a non-compete agreement. A non-compete is a document that restricts where and who you can work for should you be fired or quit. Is that legal and should you sign it? In a few states, they’re generally not legal. For example, in California, a non-compete agreement is enforceable only if someone sells a business and agrees not to compete with the new owner. That aside, California employers cannot restrict the livelihood of their current or former employees. For most other states the short answer to are non-competes legal is yes-however, the agreement has to be “reasonable” to be legal and upheld in court. Before signing, there are some things you should look for within the agreement itself before signing.
· Did you get something for it? A non-compete must be supported by consideration. This means that it needs to be part of your employment agreement, or if you are already employed, you need to be given some other benefit for agreeing to this extra restriction. This can be a change in status, a raise, a longer term on your contract, or some other tangible gain for you.
· Is such a restriction necessary for this employer? In many states, a non-compete should only be used where there is a legitimate interest to protect. Does your employer have some confidential information that they have worked hard to create and to maintain? Does your employer have customer lists built over time that are significant and stable relationships? If the answer to both is “no,” then there likely is no reason to have a non-compete restriction.
· Is the non-compete period of time reasonable? The time period you are restricted from competition with your former employer should be related to the amount of time it took to develop the confidential information or customer relationships. Most courts have found restrictions reasonable where the time period was connected to the time it took to start to receive revenue from the customer relationship, for example.
· Is the geographic area reasonable? Similar to the time restriction, many courts will generally find the geographic restriction reasonable if it is limited to those areas where you have established relationships on behalf of the employer. Even if your employer’s business has a larger geographic area than your personal work covered, a non-compete is more likely to be upheld if it only restricts the area you personally had involvement. If your work covered the city of Chicago and the surrounding suburbs, it could be unreasonable to be restricted from your profession in a 100-mile radius around downtown Chicago.
· Are you being restricted from activity that is reasonable? Your employer should only restrict you from those activities that are necessary to protect the business interest, so that you are not unfairly competing. Non-competes that tried to restrict an employee from working at all for a competitor are generally held to be unreasonable in most states. Instead, the employer should have narrowly tailored the restriction to just those activities which directly compete with your former employer.
The good news is, now you know your rights and can arm yourself with good information so that you can negotiate any non-compete you may be asked to sign. The bad news is, some employers know that their non-compete agreements toe the line of unreasonable, hence illegal- but they do not care. They will try to get you to sign on the dotted line any way by refusing to hire you if you do not. It is the very definition of being between a rock and a hard place when you are unemployed. If you find yourself in this position, first know you have legal recourse as courts frown upon companies who participate in this behavior. Secondly, you must ask yourself if this is the kind of company you want to work for? If they are using scare tactics to get you to sign an unreasonable non-compete, what else will they do once you are employed and dependent on your paycheck?
About the Auhor: Michael Helfand has been a Chicago attorney since 1997 with a focus on trying to change the way people find attorneys and legal information. In 2001 he launched a state wide network of like-minded attorneys who talk in plain English, only pursue legitimate cases and fight for their clients. Mike recognized that the unique facts of the case should determine who the right lawyer is for a case. His network makes that goal a reality and the hundreds of lawyers he partners with state wide have achieved unmatched success for their clients.