By their very nature, non-compete agreements in employment are a restraint on trade. If you require employees to sign these agreements, you should be aware that there are limitations on what can be in the agreement. Courts will scrutinize these agreements for fairness and legality.
A non-compete agreement is a contract saying that the signing individual, usually an employee, will not compete directly with the contracting firm after leaving the company.
Basic legal requirements
Since this is a contract, it must meet all the state’s basic requirements for contracts. One of those is that the employee must get something in return for signing it — and more may be required than a mere job offer or the chance for continued employment.
In addition, the agreement must protect a legitimate business interest for the employer, not merely to limit competition in general. It’s generally not difficult to establish that the agreement meets a legitimate business interest, however. Most non-competes legitimately seek to protect confidential information, client relationships and goodwill, for example.
Reasonableness is key
Because a non-compete agreement can have a material impact on the employee’s job prospects, many courts, including in Pennsylvania, have ruled that this type of contract must be reasonable in scope, geographic reach and duration.
Reasonableness in scope essentially means that the agreement can’t exclude too many types of jobs from the former employee. For example, if your company sells shoes, it might be reasonable to keep former employees from selling another brand of shoe because they have had access to proprietary information and customer lists. However, it would not be reasonable to exclude the former employee from working in any job in the apparel industry.
Similarly, it would be difficult to justify excluding the former employee from any competitive job anywhere in the world. Only high-level executives with access to a great deal of proprietary information could be excluded from jobs outside your company’s immediate market. The courts will limit the geographic reach of non-compete agreements for lower level employees.
Moreover, the courts will take a dim view of non-compete agreements that last for more than a couple of years, at most. Again, they will allow a longer duration of the agreement if the employee is particularly high-level or crucial to your organization’s success. However, the courts will not allow ordinary employees to be kept from working in their industries for extended periods of time.
Ultimately, any non-compete agreement needs to balance the legitimate needs of the company with the needs of the employee to work in jobs for which they are qualified. A different approach is required when drafting non-compete agreements for high-level employees than when drafting them for ordinary employees.
What happens if the court finds my agreement unreasonable?
If a court were to find your non-compete agreement overly broad in scope, geographic reach or duration, it could decide the agreement is void altogether. Or, it could strike the overbroad language, leaving only part of what you bargained for intact. Either way, you won’t be getting the benefit of your bargain.
Before you have an employee sign a non-compete agreement, it is best to have an experienced business law attorney review the document and make sure it supports your legitimate business goals without being unreasonable.