Think Before You Require Your Employees to Sign Non-compete Agreements

Today, the President issued an Executive Order broadly tackling the issue of competition in the marketplace. One of the particular issues that the FTC has been tasked with is to restrict the use of non-competition agreements that have become common in certain industries and limit worker mobility. In addition, several states have enacted laws that restrict the use of non-competition agreements, especially for lower-level employees. Nevertheless, there may be situations in which it is prudent for an employer to require some employees to sign non-competition agreements. As a practical proposition, such agreements are useful if an employer wants to protect something valuable that could give a competitor an unfair advantage.

Generally, non-competition agreements are governed by state laws. Every state is different, so if you decide to use non-competition agreements, it is best to have them drafted by an attorney who practices in that area. Furthermore, if your company has employees working in different states, you may need to tailor the agreements to meet the requirements of the state in which an employee works. Even the choice of which law to apply to a particular agreement will depend on a state’s law. Complicated? Yes–that’s why an attorney should draft these agreements.

Non-competition agreements are considered restraints on trade, so the chances that one will be enforced by a court can depend on what the agreement is designed to protect. Valid protectable interests include trade secrets, confidential information, confidential customer lists or databases, and even the company’s employees. The greater the measures a company takes to protect certain information from being divulged, the more likely it will be found to be a protectable interest. Conversely, if the information or the names of the company’s main customers can be readily found on the internet, they are not likely to be found to be protectable. If a company makes a big investment in employee training, it may have an interest in preventing those employees from taking that investment over to a competitor. Again, state law will determine what a protectable interest may be.

High-level management employees or employees with specialized knowledge are more likely to have access to information about the company that could provide an advantage to a competitor and are the best candidates for these types of agreements. However, the agreements must be narrowly enough drawn so that the employee is still able to make some kind of living while any restrictions are in place.

Pro Tip: The stricter scrutiny being placed on non-competition agreements means that the tactic of making all employees sign these types of agreements simply to scare them from going to work for competitors, even when the employer knows they will not be enforced, may get an employer in legal hot water.