As winter begins to set in, people start planning for the new year. Some people assess their finances. Others consider launching new business ventures. If you’re a business owner, you may evaluate your past year’s practices to determine what worked and what failed. Employees may be looking to start the new year off with a new career. No matter which you are, noncompete agreements may be a part of your new year considerations.
What are noncompetes?
Noncompetes, or covenants not to compete, are contracts through which the person signing agrees not to work in competition with the company that presented them with the agreement or term, through offering the same services or soliciting their clients, for a certain period of time during and after a term of employment or contract.
So, the employee or contractor agrees to restrict who they can work for or what services they offer during and after they leave the job or a contract ends. However, noncompetes are not exclusive to employers and employees. Independent contracts, franchisees, and business partners can all be parties to a noncompete.
Noncompetes are typically part of an employment contract. Employees usually have to sign them before starting a new job. But, employers can ask a person to agree to one at any time. Thus, it is always important to carefully read anything an employer asks you to sign.
Noncompetes are not inherently a bad thing. They help protect a company's or employer’s valuable information, techniques, client lists, etc. they have worked hard to develop.
It takes significant time and money to build a good reputation, processes, and relationships. Thus, it is reasonable to have employees or contractors agree not to use that valuable information to compete against the company. Still, these agreements are not always fair to employees or contractors, and they are typically binding once they are signed so they should be read and carefully considered.
Noncompetes are Usually Legal
Noncompetes are usually enforceable and legal in Pennsylvania, as long as they reasonably protect the business’s interest and have a reasonable duration and geographic restrictions. Business interests include trade secrets (i.e. formulas, recipes), confidential information (i.e. financial records, client lists, internal practices), customer goodwill, and investments in employees through specialized training. The agreement should detail what type of information the employer is protecting by having the noncompete.
However, determining the reasonableness of the restriction is a challenge. Pennsylvania courts have determined that the time and geography restrictions must be necessary to actually protect the business interest. Therefore, a court would probably not enforce the noncompete if your business only has clients in Pittsburgh, but you restrict employees from working for anyone in New York, and New Jersey or even Philadelphia.
Or, if your employee develops computer software that is outdated after a year, a court would be reluctant to enforce a restriction for five years. Courts typically interpret noncompetes against the employer and will be quick to invalidate them if they are too restrictive. After all, courts want to ensure that workers are able to gain meaningful employment. Ultimately, if the noncompete seems more like a penalty to an employee for leaving rather than a way to protect legitimate business interests, a court is unlikely to enforce it.
Furthermore, when the noncompete is agreed to is also vital for determining if the agreement will be valid. Every contract needs “consideration.” Consideration is a legal term that essentially means each party to the contract is receiving something for agreeing to the contract. So, when employment begins, the employer is giving the employee a job in exchange for signing the noncompete.
The job serves as the “consideration.” However, if a person signs a noncompete after employment has begun without additional considerations, that person must be given benefits for signing the agreement, such as a bonus, raise, title increase, or other consideration or it will not be enforceable.
The benefits should reflect how restrictive the noncompete is. For instance, if an employee is going to be promoted to a managerial position, the promotion could serve as the consideration for the noncompete. However, if the employee received nothing for signing the noncompete, the noncompete will be invalid.
Do employers need a Noncompete?
Not every employer needs a noncompete. Most employers may find noncompetes are unnecessary because their employees do not have access to the types of business interests that noncompetes protect. A noncompete is not accomplishing anything if employees are not aware of trade secrets, confidential information, are not vital to customer goodwill, and do not receive specialized training. Thus, the noncompete would probably not be upheld in court and may just upset employees who are required to sign it.
Furthermore, not every employee should be subject to a noncompete. If every employee in a company is subject to a noncompete, that may show that the employer is using the agreements to restrict employees. Thus, employers should be selective in who is required to sign these contracts. For instance, it is unlikely that a low-level cashier has access to sensitive business information. Thus, it would not make sense to make that person agree not to compete.
Therefore, noncompetes should be reserved for high-level employees who could use information gained at their job to aid the business’s competition. Blanket use of noncompetes can actually deter what may be good and valuable employees so they should be used with caution rather than abandon. Furthermore, employers should make sure they properly account for the information and practices they wish to protect. A poorly worded or uneforceable noncompete could end up causing a lot of damage to the company down the road.
Independent Contrators
Independent contractors and noncompetes don’t tend to mesh well. This is because an independent contractor should be genuinely independent and not working for the company full time. Independent contractors are allowed to take other business. If the contractor is so integral to the business that a noncompete is necessary, that person is probably an employee. Therefore, making them sign a noncompete may prove that the person is not independent.
Also, other contract clauses can be used to protect company information. Confidentiality, nondisclosure, and non-solicitation agreements will be enough to protect business interests. Thus, independent contractors really should not be subject to a noncompete.
Noncompetes may be reasonable for contractors if they are limited to not soliciting clients of the current company or starting a business directly in competition with the company (therefore not restricting their ability to work with a competiting company). These are seen as more reasonable limitations, so long as the other factors of an enforceable noncompete are met as well.
People Signing Noncompetes Should Negotiate Terms before Signing
Once you sign a contract, you are agreeing to be bound by its terms. Many employees are so excited to begin the new job that they will sign anything to get started. But, employment contracts need to evaluated with caution.
Sometimes employers will put a noncompete in a contract without calling it a noncompete. It may be in small print on the last page of your employment contract. Some noncompetes detail how much the employee will have to pay to the employer if they do compete, which are called liquidated damages provisions. There are lots of terms that an employer can bind you to through contracts. So, you must be sure you understand what the agreement states and if that restriction is reasonable to you.
For example, if you are an employee in the advertising field and the noncompete in your new employment contract won't allow you to work in advertising in your current town, that is a major limitation if you ever choose to leave that job. If you don't read and consider the agreement and break it, you can be made to pay damages to the employer/company for breaking the agreement.
Also, before signing may be the only time an employee has the leverage to negotiate terms out of the contract. Before employment starts, the employer also wants to get started on the right foot. So, employees should evaluate the contract and determine which restrictions they are comfortable with, and which are too limiting. If the employee is unsure of the meaning of any terms, they may want to ask the employer for clarification or consult an attorney. After signing the contract, the employee will likely be bound by the words, so negotiation must happen before the contract is signed.
Each noncompete may vary so it is important to read any noncompete terms carefully and spend the money on an attorney to review it if you aren't sure you fully understand it or need help negotiating it. Also as mentioned above, there are variations on noncompetes and they can be written in a variety of different ways with different implications, so it is important to understsand the implications unique to the one presented to you or that you want to have drafted for your company.
DISCLAIMER: This blog is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney.