Non-compete clauses have become a hot button topic, especially in tech. A non-compete clause is a type of contractual restrictive covenant in which an employee promises not to work for an employer’s competitors. Historically, non-competes were reserved for highly competitive, highly creative industries, or high-level executives with access to company trade secrets. Lately, non-competes have become so common that employees are presented with them even in industries and positions that do not involve trade-secrets or other sensitive or proprietary information. Companies have increasingly asked employees at all levels to sign these agreements, putting constraints on a growing number of workers. This trend has led to push-back by workers, state legislatures, and the courts.
Tech and other workers hear plenty of misinformation about non-competes, including the notion that non-competes are generally unenforceable (we can probably thank TV and movies for that one, since non-competes are very rarely enforceable in California). California is the exception, however, as most states allow at least some type of enforcement of non-competes.
There are, of course, both positives and negatives to the enforcement of non-competes. For employees, however, the effects can be devastating to a career and an individual’s ability to obtain higher wages and move up the job ladder.
So what should you do when you are presented with an employment contract that may contain a non-compete clause??
Step 1: Read the contract!!!!
Do not sign on the dotted line before reading and understanding THE ENTIRE agreement!
This seems pretty obvious, but we are presented with lengthy contracts, privacy policies, and terms and conditions in every wake of life. And we rarely (if ever) read them. How could we? According to study done by Carnegie Mellon researchers, reading all of the privacy policies an average Internet user encounters in a year would take 76 work days.
An employment contract, however, will affect your entire life. So, read it! You may feel pressure to sign on the dotted line as soon as an employment contract is placed in front of you. You may think it’s pointless, or will reflect negatively on you in some way. Even if this is your first job and you know you have little bargaining power, take your time. It is not unreasonable to read your contract. Most employers should want employees that make reasoned decisions. If they don’t, they may be trying to take advantage of you, and you should reconsider your placement at that company.
You should consider retaining an employment law attorney to go over your contract before signing. Non-competes are only one aspect of an employment agreement that a lawyer can analyze for legality and fairness.
Also, even if you may have limited funds, many attorneys understand and you may be able to negotiate lower pricing for more limited services (such as a cursory document review of the contract, or if you are worried about the non-compete portion you can limit the services rendered to just the non-compete portion of the contract or other specific sections or questions you may have).
Step 2: Understand the laws of the jurisdiction you are in
Even in jurisdictions that do allow non-compete clauses, there are specific requirements that the clause must meet for them to be enforceable. Generally, in order for a non-compete to be legally valid, the agreement must:
- Be supported by consideration at the time it is signed;
- Protect a legitimate business interest of the employer; and
- Be reasonable in scope, geography and time as to not cause substantial hardship
You may have just read that and thought, but what does that mean? That is a valid question, and one that does not have one clearly defined answer. Some courts consider a valid non-compete as being valid anywhere between six months to two years. Some may allow longer time periods.
The scope is the extent of your limitation. This could come in the form of a specific list of competing firms from which you are blocked from working, or the scope of the non-compete could be phrased to prevent you from holding a similar job in the same field as your employer. An example of an overbroad scope is a non-compete which would prevent you from performing the same type of services for any firm. If a non-compete effectively prevents a worker from earning a living in his or her profession, it will almost always be found un-enforceable.
What are the geographical limitations? Does the contract say anywhere the company does business? With so many tech companies living on the Internet, that could mean the entire world. If the company cannot present a clearly defined legitimate business interest protected by the geographic limitation, it will most likely be un-enforceable
If a non-compete is found to be unreasonable some courts allow the agreement to be modified in order to be considered “reasonable.” This could include narrowing the scope or geography or shortening the duration. The disparity in treatment makes determining what is a reasonable non-compete clause extremely challenging.
Step 3: Discuss the contract and understand all of its terms
Some managers may not have a complete understanding of what or why the contract was written the way it was. A company may use a standard (boilerplate) contract for its entire company, which could adversely affect many employees that the company doesn’t necessarily need to have a non-compete with. If you have questions about specific terms or sections, ask. Make sure everyone is on the same page.
If you were presented with a standard company contract, tailor the agreement to your specific job as much as possible.
Step 4: Negotiate
If the contract seems unfair to you and you are worried that the non-compete clause in the contract could seriously affect your employment opportunities in the future, then try to negotiate before signing. There are other restrictive covenants in contracts that could achieve the same goals the company is trying to achieve. If the company is worried about protecting their trade secrets or client lists, a confidentiality clause can accomplish the same thing without limiting your ability to work in the future. Legal teams are hired to write contracts that have the broadest protection for their client. That doesn’t mean that the contract terms cannot be negotiated to be fair for everyone.