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Important Considerations When Utilizing Noncompete Agreements
Sep 19, 2024 8:00:00 AM
A noncompete agreement is a legal contract between an employer and an employee that restricts the employee from working for competitors or starting a competing business for a specified period after leaving the company. These agreements help businesses protect trade secrets, proprietary information, and customer relationships by preventing employees from using confidential knowledge gained during their employment to benefit a rival. However, while noncompete agreements offer some level of protection to companies, employers must also be aware of their limitations and legal considerations.
In August 2024, a Texas District Court set aside the Federal Trade Commission’s (FTC) Final Rule that sought to ban most noncompete agreements for U.S. employers. While this ruling may not go into effect unless overturned on appeal, it is a reminder that employers should stay informed about current laws governing noncompete agreements.
State Laws and Variations
Although there is no federal ban on noncompete agreements, individual states have enacted laws that either limit or prohibit their use. For instance, noncompete agreements are unenforceable in California, Minnesota, North Dakota, and Oklahoma. In these states, noncompetes should not be used in any employment relationship. In states where noncompete agreements are permitted, there are often restrictions based on the employee's role or level within the company. Here are some examples:
- Georgia: Noncompetes cannot be enforced against employees without specialized skills, customer relationships, or access to confidential information.
- Massachusetts: Prohibits noncompetes for nonexempt employees, interns, students, employees under 18, and those terminated without cause or laid off.
- Missouri: Noncompetes cannot be applied to secretarial or clerical workers.
- Oregon: Restricts noncompetes for nonexempt employees, those below a certain earning threshold, home care workers, and personal support workers.
- Low-wage workers: Noncompetes are banned for low-wage workers in states such as Illinois, Maine, Maryland, New Hampshire, Rhode Island, Virginia, and Washington.
In addition, some states, including Colorado, Illinois, and Maine, require employers to provide pre-employment notice if a noncompete agreement will be part of the employment terms.
Reasonableness of Noncompete Agreements
Even in states with lenient laws regarding noncompetes, the terms of the agreement must be reasonable. Typically, a noncompete agreement will include both a time limit and a geographical restriction on where a former employee can work. What constitutes a reasonable limitation is generally determined by state law or court rulings. For example:
- Florida: Any restriction of six months or less is considered reasonable, while any restraint lasting more than two years is deemed unreasonable.
- Texas: Noncompetes must have reasonable limitations on time, geographical area, and scope of activity. The restrictions cannot be broader than necessary to protect the company’s goodwill or other business interests. For instance, if your roofing company operates within a 50-mile radius, a noncompete that prevents an employee from working within a 100-mile radius after leaving would likely be deemed unreasonable under Texas law.
Legal Considerations
If your company plans to implement a noncompete agreement, it is essential to consult with an attorney to ensure the agreement is legally enforceable and fair. Courts may throw out the entire agreement if they find any part of it—such as the duration or geographic scope—to be unreasonable. By having a noncompete agreement carefully reviewed by an employment attorney, you can reduce the risk of it being deemed unenforceable and ensure better protection for your business.
In addition to consulting with an employment attorney, clients of FrankCrum can reach out to their HR Consultant for their HR needs.
