Dear Attorney, I have several employees who have generated a significant book of business over the years. I want to keep these employees from being able to leave and take my customers with them. Can I have them sign non-compete agreements? If so, what are the rules I need to know about non-complete agreements? – An Entrepreneur
Non-compete agreements are legal, and they are enforceable, but only if drafted properly. A company can use a non-compete to prevent employees from working for a competitor, or opening a competing business, for a reasonable amount of time and within a specified geographical area.
Before you ask your employees to sign a non-compete, however, there are a few things you should know about them. First, these are restrictive covenants. Courts in North Carolina do not look favorably upon them and narrowly interpret them.
Second, the court will look critically at the conditions imposed on the employee and try to balance the interests of the employee and employer. Typically, the employee argues the geographic restriction is unreasonable, or the time period included is too long. The employee will likely argue that the non-compete makes it hard to move, change jobs or even provide for oneself. If the court is not convinced that your non-compete exists solely to protect your legitimate business interests within the restricted area and time period set out, the court will invalidate the entire non-compete.
In addition, the non-compete provision must be:
1. “In writing” and “part of the employment contract.” Do not rely on a verbal promise or handshake; reduce the non-compete to a valid, enforceable written document.
2. “Consideration” means both sides are giving something to the other. Lawyers loosely define this as a “bargained-for exchange.” If a non-compete is signed at the beginning of employment as a condition of employment, the new job is usually held to be the consideration. However, if a current employee is being asked to sign a non-compete, then the employer will need to give additional reasonable consideration (typically monetary). The failure to give new consideration to a current employee has resulted in the on-compete being invalidated by the courts. Do not skip this step.
3. “Time” and “geographic area” are typically the most controversial aspects of a non-compete. North Carolina does not define what is acceptable, but courts do require them to be reasonable. An agreement restricting an employee for five years and statewide for a Charlotte-based company will almost certainly be unreasonable. A one or two-year term and fifty-mile radius from the company headquarters for a Charlotte-based company has been considered reasonable. However, these are not hard fast rules when considering that a Charlotte-based company could operate statewide and a statewide restriction might be reasonable. Hence the need for a lawyer to review your business’s operations and draft the non-compete specific to your company and needs.
4. “Public policy” is not easy to define, except in terms of what violates it. Creating a monopoly at the expense of the public, or trying to stifle normal, healthy business competition, would violate public policy. Assuming your non-compete is seeking to protect a legitimate business interest, this should not be a problem.
Non-competes are the textbook example of legal issues that are handled on a case-by-case basis. There is no cookie-cutter solution. You should talk to a knowledgeable attorney about your specific business and how best to carve out reasonable restrictions that protect your legitimate business interests without unduly restricting employees.
Disclaimer: The information contained in this article is general in nature and not to be taken as legal advice, nor to establish an attorney-client relationship between the reader and Laura H. Budd or Weaver | Budd, Attorneys at Law. Submit your questions for The Fine Print to: email@example.com.