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Reasonable Non-Compete

Question:

What considerations need to made in order for a non-compete agreement to be reasonable?

Answer:

It may seem ironic that companies encourage innovation and brilliance while employees are on the payroll, but they pull the plug on that ambition if employees dare to leave. But non-compete agreements attempt to do just that:  to control damage.

Whether signed when staff members come on board, or as part of a ream of paper presented as they leave, non-compete agreements have similar restrictions. An employer lays claim to any products, intellectual property and ideas developed while on the job. And customers or clients handled while a staff member was employed by the company are also generally off-limits.

Courts have tried to balance the interests of employers and departing employees in deciding whether or not a non-compete agreement should be upheld. In order to hold up, here are three areas in which the agreement must be reasonable:

  • Time. You obviously can’t restrict a former employee from competing forever. The time period considered reasonable is one to three years. Sometimes this period is shortened, depending on the industry. For instance, in high-tech businesses where information changes quickly, the restrictions are frequently shorter.
  • Geography. You can make restrictions in the area where your company does business, but probably not nationwide or worldwide. One exception is Internet or software companies that operate worldwide.
  • Scope. No non-compete agreement can strip an employee of the right to earn a living. An agreement can restrict certain core functions, but it can’t prevent an employee from using skills acquired over years. Agreements are analyzed for reasonableness by the courts.

Restrictions must normally be limited to the job the employee performed for the employer. For example, a software engineer for one automaker can’t be restricted from taking a sales job at another manufacturer’s showroom.

Non-compete agreements are subject to the laws of the state in which they’re written. Some states don’t recognize them. Others stipulate that employees must enter into the agreements when first hired. If the document is sprung on an employee later — up to and including quitting day — the company may have to offer something extra (such as a promotion, raise, stock options or other enticement) for the agreement to be valid.   So the best time to secure an agreement is generally when you hire an employee.

To sum up, you can prevent staff members from competing with you after they leave your company but the exact restrictions depend on many things — most importantly, whether circumstances make it reasonable and enforceable.  Consult with your attorney for assistance in drafting the agreement or if you feel a former employee’s conduct violates a non-compete agreement.

Special thanks to Gregory E Ossege for submitting his response to this question. Greg is the managing partner of Ossege Combs & Mann, Ltd. a Cincinnati area CPA and Business Consulting firm. He can be reached at gossege@ocmcpas.com or 513-241-4507. Also, see www.ocmcpas.com for further information.

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