Clients often ask me whether employee restriction provisions, such as non-competes, are enforceable. On a basic level, these provisions place restrictions on employees after their termination or resignation so that they cannot immediately begin working for a competitor, hiring away other employees of the company, or using customer lists. The keys to enforceability are specificity and reasonableness.
For non-competes, courts will generally look to whether the restriction is of a reasonable duration and geographic territory. The reasonableness test is analyzed on a case by case basis. For instance, for a local service company, a reasonable non-compete may state that an employee agrees not to open a similar company in the same county for a one year period following employment. On the other hand, for a global company, a reasonable territory restriction would be much larger so long as it was limited to the specific industry. Considering all of the factors for the particular job at issue is important for crafting a provision that will hold up.
Non-solicitation provisions often come up in the context of hiring away employees and preventing former employees from using customer lists. With respect to hiring away employees, the reasonableness standard will apply, however, when it comes to protecting customer lists, a well-crafted provision can protect those for much longer. The best way to protect a customer list or similar data is to treat them as trade secrets, which are protected in perpetuity under intellectual property law.
What happens if you aren’t reasonable or specific in employee restriction provisions? The court will determine what is reasonable by taking into consideration factors such as the industry standards, the nature of the job, the market reach of the company at hand, and the burden of the restriction on the employee’s ability to find work. In order to avoid leaving this up to the court’s discretion, it is always best to spell out the details in an agreement. When deciding on what is reasonable, remember that a court will be especially critical of anything that seems punitive or excessively burdensome.
The point of employee restrictions is twofold: 1) incentivizing retention, and 2) mitigating a loss of your competitive advantage when an employee does move on. Thus, it is important not to lose sight of this when thinking of what a reasonable restriction would be. If you craft a restriction that is vindictive, it is likely to be found unenforceable. Striking the balance between protecting your company’s interests while being fair to a former employee can be a challenge but the benefit of maintaining a competitive edge is crucial to long term success.