As competition in the marketplace intensifies, talented and educated employees are the key to success. In many businesses, the loss of a few key employees to a competitor could spell the end of the enterprise. As a result, the covenant to not compete has become an important part of employee contracts in the last decade. I often receive calls from individuals who wonder if their non-compete is enforceable. More often, I am called and asked if agreeing to one is a bad idea. This article focuses on these issues.
Q: I am interviewing for a new job and the advertisement says I must be willing to sign a non-compete. What is that?
A: A non-compete is a written, enforceable contract that prevents a party thereto from taking similar employment, in the same or similar industry, in the same geographic area. For example, a tax preparation software designer may have a non-compete in his contract preventing him from taking employment with another a tax preparation software company in the event he quits or is fired.
Q: Why would I want to agree to one of these?
A: You never want to agree to one of these but many employers will leave you no choice. When you think about it, if you owned a product development company, you would not want your employees to be lured over by a competitor for a higher salary. Each employee lost will reveal company secrets to an employer’s competition.
Q: What will happen if I refuse to agree to the provision?
A: Nothing. The employer will not offer you the job, in most instances, and you will be free to seek employment with a competitor.
Q: Is it legal for a company to refuse to hire you because you will not sign a non-compete?
Q: I recently took a job with a local trucking company in their sales department. When I was hired, the personnel manager told me that I was not allowed to take a position with a competing trucking firm if I left their employment. Is this true?
A: This is true only if you have signed a non-compete agreement in your employment contract. Texas law does not allow the enforcement of an oral non-compete agreement.
Q: So any written non-compete will be enforceable?
A: No. In order to be enforceable the non-compete must be paid for in addition to your salary. For example, as a salesman, they would have to pay you a salary/commission in addition to a rate for the non-compete. The agreement must provide for a separate payment.
Q: Are there any other restrictions in the deal?
A: Many. In fact, if you are an employer offering the non-compete, you should have the provision reviewed by an attorney because they are often thrown out in court. Making them enforceable is very difficult to do.
Q: What are the provisions in a non-compete most questioned by the courts?
A: The covenant’s duration, its territorial coverage and the scope of the restricted activity.
Q. What is the “covenant’s duration”?
A. A non-compete can not be in effect for a person’s lifetime. It must be limited in scope. This will depend upon the industry and the longer it is made, the higher the chance a court will not enforce it. A good rule is for the provision to not exceed five years. However, in some industries five years may be too long. The rule of thumb is to make the length of time effective but fair.
Q. What about the “territorial coverage”?
A. This one is simple. If your sales area is Houston, then the non-compete must allow you to go to Dallas, Austin, or elsewhere and find a new job doing the same thing – fifty or a hundred miles is a good barrier. Agreements that extend further are often shredded by the courts.
Q. Finally, what about the “restricted activity”?
A. This one is also simple. Since you are in sales, the restriction must prevent you from taking a sales position only. If you want to take a position as a mechanic with a trucking company, the agreement should allow you to do so as the position will not likely require you to use the special skills or knowledge gained with the competitor.