Validity of Non-Compete Agreements

Non-compete agreements are used to ensure that employees don’t work for competitors or start their own competitive business after their employment ends—but the validity of non-compete agreements depends on state and federal law. Some states outright ban non-compete agreements, while others heavily limit how they can be used. Furthermore, the FTC has proposed a new rule which would ban non-compete agreements, and rescind all existing versions nationwide.

If you’re planning to ask employees to sign a non-compete agreement, you should be aware of requirements for enforceability. Here’s what you need to know about creating and enforcing non-compete agreements.

How effective are non-compete agreements?

Non-compete agreements are currently enforceable in most states. They prevent former employees from working for competitors or starting their own business after employment ends, whether in a standalone agreement or as part of a wider employment contract.

Generally, as long as the agreement complies with state and federal law, they are quite effective. The agreements are made on condition of employment, and typically include provisions limiting the employee from seeking employment with competitors for a certain length of time, in a geographic area or within a specific market. The contracts typically include penalties for breaching the agreement, which disincentivizes the employee from working with competitors.

However, if you try to create an agreement which is overly broad or prohibited by state or federal law, it will not be legally enforceable.

How long do most non-compete agreements last?

To be enforceable, a non-compete agreement’s provisions must be reasonable. The definition of “reasonable” can vary, based on the industry, job title, location, and other factors. Most non-compete agreements last between six months and two years, but rarely longer than that.

It’s important to remember that non-compete agreements cannot continue indefinitely. That limits the worker’s employment options and gives employers an unfair advantage. Be sure to clearly define a reasonable duration in any non-compete provisions, or they will not be legally enforceable.

What makes a non-compete invalid?

There are four broad areas which could make a non-compete invalid:

• Legitimate business purpose: First, your non-compete needs to have a legitimate business purpose. That purpose is typically evaluated on a case-by-case basis. Common legitimate business purposes include protecting confidential company information and processes. These need to be narrowly tailored to the employee and the scope of their employment, or it could be unenforceable.
• Limited to particular industry or activity: You cannot prevent workers from seeking employment in unrelated areas, such as if a software engineer decided to go into marketing for a retail company. Non-competes must be limited to particular industries or activities.
• Geographic location: Next, any geographic locations must be reasonable for the specific industry and job involved. This is again evaluated on a case-by-case basis.
• Duration: Finally, non-competes can be invalidated if their duration is too long. They cannot continue indefinitely, and need to be reasonable for the industry, type of employment, and legitimate business purpose.

Of course, it’s also important to note that if your non-compete agreement violates specific state or federal requirements, it can be invalidated on that basis, too. For example, California has banned non-compete provisions, except in the sale of a company. Asking an employee to sign a non-compete under any other circumstance would render the agreement invalid.

Non-competes also need to offer valuable consideration to the person it binds. Generally, employment is considered consideration—but if you’re asking an existing employee to sign an agreement after they were hired, additional consideration, such as a bonus or promotion, is required.

How hard is it to enforce a non-compete agreement?

Non-compete enforceability depends on whether the agreement is state- and federal-law-compliant, in addition to meeting the standards above. If your agreement isn’t narrowly tailored to support a legitimate business purpose, it’s unlikely to be upheld in court.

Discover SixFifty’s employment agreement tools

The validity of non-compete agreements often depends on how well the agreement is drafted. Because state laws can vary dramatically, you’ll need to research for each state in which your employees live and work. Furthermore, it’s important to keep up on changes to the law—for example, if the FTC’s proposed ban goes into effect, or if a state enacts their own ban first, all of your non-compete agreements will be rescinded.

SixFifty has designed legal tools to ensure that your employment agreements are enforceable in every state. Our software pairs easy-to-use technology with real legal expertise, so you can automatically generate state-specific and federally compliant employment documents. Simply answer a few questions about your business and employees, download the generated document, and have your lawyer review. Best of all, we’ll keep you updated whenever the law changes, so you’ll never have to worry about the validity of your non-compete agreements.

Learn more about our employment tools by scheduling a product demo today!