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Employers may think that their noncompete agreement or restrictive covenant prohibiting departing employees from taking a similar job at a competitor is ironclad, but that's not always true.
The laws in many jurisdictions generally support reasonable noncompete agreements in employment, but other regulations limit restrictions on separated employees.
David B. Ritter, a partner in the Chicago office of law firm Barnes & Thornburg, spoke to SHRM Online about the enforceability of restrictive covenants, what to consider when crafting them and which states limit enforcement of these agreements.
[SHRM members-only how-to guide: How to Create an Offer Letter Without Contractual Obligations]
SHRM Online: What should HR know about the enforceability of restrictive covenants?
Ritter: The law varies from state to state. As a result, what may be enforceable in one state may not be enforceable in another state. Employers should not use a one-size-fits-all approach and should tailor the agreement for the situation. Employers must make sure that the restrictive covenant is supported by adequate consideration [a critical element of contract law]. In some states, providing a job or continued employment is sufficient. In other states, it is not adequate consideration if the employee is employed "at-will." In such a case, an employer should have the employee sign the restriction when being promoted or receiving a bonus.
Restrictive covenants that are reasonable in terms of time and scope stand a better chance of being enforceable. Some states will permit a restrictive covenant to be as long as three years. In my experience, rarely is more than a year necessary.
In terms of scope, an employer should only restrict an employee from competing in a geographic area the same as the area he or she worked for the former employer; otherwise the restriction can be ruled overbroad. An alternative to a geographic restriction is a restriction that the employee cannot solicit the employer's customers that the employee worked with while employed. The restriction should also only limit the employee from doing similar work as he or she did for the former employer; anything more runs the risk of having the restriction being ruled invalid.
SHRM Online: What else should employers consider when crafting these measures?
Ritter: Employers need to be flexible and only restrict former employees to the extent necessary to protect the business. The same restrictive covenant should not be used for all employees throughout the country as the law varies from state to state. Also, the type of restrictions that may be appropriate and necessary for a high-level executive will not be the same as the restrictions needed for a salesperson or an engineer or chemist. An employer should consider whether the employee is working in the same state as the employer or if the employee is located in a remote location, perhaps working from a home location. In either case, the employer should carefully decide which state law is going to apply to its restrictive covenants and expressly say so in the agreement. Similarly, the employer should include a venue provision so that if the agreement needs to be enforced, the employer can do so in its backyard; the agreement should also expressly say what state the venue will be and that the employee agrees to venue in that location.
SHRM Online: Which states are particularly limiting when it comes to restrictive covenants?
Ritter: California is the poster child for states that limit restrictive covenants; noncompetition provisions are invalid and unenforceable. Nonsolicitation provisions are also unenforceable except to the extent the former employee is competing using the employer's trade secrets. Colorado, Montana, North Dakota and Oklahoma also disfavor such provisions. North Dakota prohibits noncompetition provisions by statute, and the North Dakota Supreme Court ruled that nonsolicitation of customer provisions are likewise invalid. There are a number of other states where the law supports invalidating a restrictive covenant if it determines that the restrictions are not reasonable. Unlike many other states, these states refuse to judicially modify the offending provisions.
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