Should businesses have non-compete clauses?
From working at home, to layoffs, to total closures, 2020 has shaped the way businesses will operate moving forward. As a result, laid-off workers and struggling entrepreneurs are finding creative ways to maintain their income and forge new paths. In 2014, freelancers made up 17 percent of the workforce. As of 2020, that number has more than doubled to 36 percent.
With a vast change in workforce, businesses must navigate these challenging times by being flexible with their employees, utilizing freelancers effectively, and at the same time protecting their business’s assets.
Noncompetes, or restrictive covenants, are useful tools in this regard if a business understands how to use them effectively. A true NONCOMPETE is an agreement by an employee not to compete with their employer after their employment ends. Typically, a noncompete prohibits a former employee from participating in a similar line of business as the employer’s, for the specified time period.
Arizona allows noncompetes, but they are disfavored by the courts, where they are strictly analyzed for enforceability. The more restrictive the agreement (and, thus, the more protections being reserved by the employer), the less likely the agreement is to be enforced under the law. The law does not look favorably upon restrictions on employees’ right to work, so, while reducing turnover may be an ancillary benefit to utilizing noncompetes, merely retaining employees—especially lower-level employees, such as service workers—is not generally recognized as a legitimate purpose for a noncompete under the law.
There may be additional resources that businesses can use to protect their entities, while allowing their employees to make a few extra dollars.
A NON-SOLICITATION AGREEMENT is aimed more narrowly at merely prohibiting an employee from soliciting their employer’s customers and/or their employer’s employees. In contrast to a noncompete, a non-solicitation agreement allows an employee to immediately begin competing with their former employer. The employee simply must refrain from soliciting the group of people specified in the agreement—usually the former employees clients and/or workforce—for the specified amount of time. Because a non-solicitation agreement is less restrictive, it is also generally easier to enforce. As with noncompetes, however, the likelihood of being able to enforce it is increased by narrowing the agreement as much as possible, such as by limiting the length of time it is in effect, and limiting the number or category of clients to which it applies. Non-solicitation agreements are often combined with, or even replaced with, nondisclosure agreements (NDAs), which generally restrict and employee from sharing or using an employer’s confidential information.
Businesses can include certain terms to make their noncompetes more effective and more likely to be enforceable. First, a business greatly increases the likelihood that a noncompete will be legally enforceable by including TIME AND GEOGRAPHIC LIMITATIONS that are as narrow as reasonably possible. For example, restricting a former employee from competing within a 10-mile radius for six months is more likely to be enforced than restricting a former employee from competing anywhere in the state for a year.
Next, a business should specify the EFFECTIVE DATE AND TERM OF THE AGREEMENT. In other words, specify when the terms of the agreement go into effect, and for how long the restrictions are to remain in place.
A business is generally benefitted by including a REASON the restriction is necessary. A noncompete is invalid unless it exists to protect an employer’s legitimate interests beyond simply avoiding fair competition. A “legitimate” interest is generally something like preventing a former employee from utilizing information or relationships that are unique to the employer in the marketplace.
An employer should specify what the employee is getting in return for signing the agreement, also known as CONSIDERATION or quid pro quo. A noncompete is not valid unless the noncompete is part of a larger employment contract (and, thus, what the employee is getting is their employment), or the employer gives the employee something in return for signing the noncompete.
To increase the chances of enforceability, businesses should include a SEVERANCE CLAUSE in noncompetes, stating that if a certain portion of the noncompete is found unenforceable, the remainder of the agreement will still be upheld. In the same vein, employers can go further to include a STEP-DOWN PROVISION, which may allow a court to narrow an overly broad noncompete so as to make it enforceable.
Businesses should strongly consider having a lawyer review their agreements, including noncompetes, non-solicitation agreements, and NDAs. In the event a former employee breaches a noncompete, putting a business at risk, hiring litigation counsel to get ahead of the problem is advisable.
Nancy R. Giles is the managing partner at Giles Law, PLLC. The firms mission is to support, advise, and represent businesses facing legal issues and conflicts. Equipped with over 20 years of experience in commercial litigation, Nancy and her team use inventive and efficient strategies to create exceptional results. For more information, visit www.gileslegal.com.