How To Avoid Overly-Restrictive Non-Compete Agreements
Employment attorneys, are often asked by employers, “How can I protect my company from employees leaving with critical information or being poached by a competitor?” One way that employers can protect themselves is to prepare reasonable non-compete agreements that have the effect of deterring competitors and, likewise, encouraging retention amongst the workforce. There are, however, pitfalls which must be considered by employers before the execution of these non-compete agreements. Generally speaking, West Virginia courts will accept and enforce non-compete agreements that (1) are no more restrictive than required for the protection of the employer; (2) do not impose an undue hardship on the employee; and, (3) are not injurious to the public.
Avoid The Overly-Restrictive Agreement
While it is important for employers to be adequately protected, oftentimes employers enter non-compete agreements that are overly-broad and unduly restrictive. This, more than any other factor, is most likely to lead to a court finding that the agreement is unenforceable. First, be sure to create an appropriate geographic radius for the non-compete. An agreement that includes a 50 mile radius from the employee’s office has been found acceptable. Under certain circumstances, a greater radius may be appropriate, for example, where the employee has a particular expertise not otherwise available in the area.
Second, it is important that the non-compete period not be for longer than necessary to sufficiently protect the employer’s interests. This period is the time after the employee ceases employment with the employer during which s/he may not work under the terms of the agreement. A 10 year non-compete will almost never be upheld as a reasonable restriction. Typically, a one year restriction will be found to be reasonable.
Third, the agreement should not be intended to intimidate employees but, rather, should be designed to protect the employer’s interests. Therefore, employers should avoid inclusion of liquidated damages provisions that are unreasonably high for the particular employee involved. Instead, it is better for employers to include language that allows them to recover the reasonable expenses incurred as a result of the employee’s breach of the non-compete, including attorneys’ fees and any lost profits.
Be Selective With Your Non-Compete Agreements
Another issue that comes up when these agreements are analyzed occurs when employers require all employees to execute the same non-compete agreement, from a low-level staffer up to the executive vice president. When reviewed in total, courts tend to be apprehensive of this procedure because non-compete agreements should not be “one size fits all” by their very nature. An executive employee, generally speaking, will require a more restrictive agreement because s/he will have access to more essential or confidential employer material. Contrast that with a mid-level salesman or staffer who, while critical to the overall business, is not privy to the same information as the company executive. Therefore, it is important that employers tailor these agreements to protect themselves for each level of their employees.
Additionally, employers must consider whether a non-compete is even appropriate for a particular employee. For instance, it would be unusual for a court to enforce a non-compete agreement for an administrative or secretarial employee.
Provide Consideration For The Non-Compete Agreement
Employers frequently do not provide a payment or other benefit to a prospective employee for the execution of a non-compete agreement. Rather, employers contend that the non-compete agreement is an integral part of the employment relationship, and that, without its execution, the prospective employee will be passed over for the particular position. Because many times the employee is in an unequal bargaining position, courts have frowned upon such “take it or leave it” non-compete agreements.
While not required, a better approach for employers is to incentivize the execution by providing some sort of consideration. It may be as simple as a lump sum payment for the agreement’s execution, such as $100.00. Or it could be made clear that the employee will make slightly more per hour in exchange for the execution of the non-compete. Regardless of the form, it is always a best practice to provide this type of incentive so that the court reviewing the agreement later does not strike it down as unreasonable because the employee received nothing in return.
Perhaps the most critical part of any non-compete agreement is that it clearly states that the agreement itself does not alter the at-will nature of the employee’s employment with the employer. In other words, the employer retains the right to terminate the employee for any reason or no reason at all. This should be explicitly stated within the agreement.
What Happens When The Employer Terminates The Employee?
Lastly, it is critical that the agreement consider whether it will stay in full force and effect if the employer terminates the employee. This can be particularly difficult to gauge. On the one hand, courts do not want to limit employees from future employment when the employer has discharged him/her, especially where there is no wrongdoing by the employee leading to termination. On the other hand, the employer may want the agreement to remain in place to ensure that the training and confidential information the employee has received does not immediately go to a competitor.
While there is no “right answer” to this question, the employer could include a reduced non-compete period for no cause terminations. Therefore, if the typical period is one year, the agreement could reduce that period to three months for no cause terminations. This enhances the chances the provision will still be found to be enforceable.
While non-compete agreements can be a useful tool for employers, they must be properly tailored and limited to an appropriate scope of employees and restrictions. An unenforceable non-compete agreement can be dangerous and can lead to unnecessary litigation and unrest for an employer. Taking care of these issues on the front-end can alleviate these downstream issues in the long-term.