Nowadays, most of the employers in the United States require new employees to enter into non-compete agreements prior to starting work. Such agreements are usually effective after the employer-employee relationship has ended.
Employers use non-compete agreements for various reasons, including protecting trade secrets, intellectual property, sensitive information or goodwill. However, while non-compete agreements are widely used across the United States, they represent a very controversial topic, and the approach towards them is not uniform among the states. The major concern with non-compete agreements is to respect a balance between the employer’s interest, and a former’s employee right to a earn a living. This article discusses the non-compete agreement meaning and how it works in the United States.
A non-compete agreement is a legally binding contract in which the employee agrees not to work with a rival company or start a similar business for a certain period of time after leaving the position with the current employer.
In general, in order for a non-compete agreement to be valid it must be supported by consideration at the time of executing the agreement, it must protect a legitimate business interest of the employer, and must be reasonable in scope, time and geographic limitations.
Non-compete agreements must be supported by valid consideration. In other words, the employee must receive something of value in exchange for the promise to refrain from competition. Further, the employer must use the non-compete agreement in order to protect a legitimate interest or their confidential information. Lastly, but perhaps the most important is the reasonableness of the agreement.
When a court addresses a non-compete agreement enforcement case, the court will analyze whether the duration and scope of the non-compete agreement is reasonable. This is a circumstantial analysis and the court decides on a case by case basis. For example, if the non-compete agreement is designed to protect confidential information, the duration of the agreement should not be longer than the time in which the information has value. Further, the restriction on competition in a certain geographic area must also be reasonable. For instance, a company that is only based in one state cannot include competition restrictions in more states. Also, if a court finds that a non-compete agreement is overbroad, it can narrow down the scope and the duration of the agreement.
While most states do recognize and allow the courts to enforce non-compete agreements, some of them do not consider such agreements valid. According to the United States Treasury, about 30 million U.S. workers are bound by non-compete agreements at their workplace. Only California, North Dakota, and Oklahoma forbid enforcing them altogether, and in nearly half of the states, these agreements can prevent even laid-off employees from working in their industry for a year or more. On the other hand, Florida’s noncompete statute uses a reasonableness test to determine enforcement of non-compete agreements. Reasonableness is the primary standard resorted to throughout the statute to determine whether a non-compete agreement is enforceable. As a result, the non-compete agreement must be “reasonably necessary to protect the legitimate business interest” of the party trying to enforce the agreement.
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