The Federal Trade Commission is considering making non-compete agreements a federal issue by banning them.
According to research, one in five employees have a non-compete, which is about 30 million Americans. The FTC claims a ban would lead to better job opportunities and increase wages by $300 billion a year.
Companies would have to find another strategy to protect investments. But it could take years for a final outcome, accounting for passage and pending court challenges.
Right now, however, employers have a bigger concern: Are their existing non-compete agreements enforceable?
The answer presents a real issue for too many companies—and they don’t even know it.
Here are five common reasons why non-compete agreements fail:
Attorney Alert: No Consideration
This is one of the most common problems with enforceable non-compete agreements.
When you onboard a new employee, employers should make the signing of a non-compete agreement part of the process. To create a valid agreement, you must offer the new employee “consideration,” which means an exchange of value. Because you ask new employees to sign on day one, you can write into the agreement that the job and future compensation are consideration for the signature.
If you need an existing employee to sign a non-compete agreement, you will have to put more effort into it. Maybe it is a new title, more money and/or different responsibilities at the company. The “consideration” doesn’t have to be large, but it needs to be real and distinguishable.
Otherwise, you may have an unenforceable non-compete agreement that you assumed was valid.
Attorney Alert: Too Long in Duration
The objective of non-compete agreements is to protect the company, not to punish your employees. Asking for a non-compete for the rest of someone’s life is a non-starter.
Courts have ruled favorably, however, on shorter terms. Generally speaking, six months is practically a certainty. Yet, more than two years could get tricky. If it involves an acquisition, you may be able to get three years.
In any case, you should consult with your lawyer because these matters, especially the ones involving longer terms, tend to be decided on specifics. So, make a small investment to spend time with your trusted counsel—you will thank yourself later.
Attorney Alert: Reliance on a Template
Don’t fall for convenience and use a template for your non-compete agreement. And that goes for older, outdated forms your company has used since its inception.
Every industry is different. Every company is different. Types of proprietary information and confidential relationships vary quite a bit.
What if your company crosses state lines? What if your company has employees who work in different states? When it comes to law regarding non-compete agreements, each state makes the call.
Your leadership team should protect its interest by consulting with an attorney to ensure nothing is lost in the future.
Attorney Alert: No Assignment Provision
When acquiring a company, too many companies forget to obtain non-compete agreements from key personnel at the other company. This oversight can be costly.
One reason for the miscue, in part, is the assumption that the acquired company had included an assignment provision in their non-compete agreements. An assignment clause allows one party to transfer negotiated rights to another party—without re-opening negotiations.
Assignment provisions (i.e., Company A or assignee) can make things easier. Without them, you will have to ask the incoming employees to sign another non-compete agreement, which could prompt talks regarding more consideration.
Some states may prohibit or limit assignment clauses, so review them with your attorney.
Attorney Alert: Not Compliant With State Law
In addition to being a case-by-case matter, non-compete agreements hang on a state-by-state basis.
For example, these agreements are not enforceable in Oklahoma and California. Nine other states prohibit non-competes for employees who earn more than a set amount. Iowa and Kentucky only prohibit the agreements for health care workers.
In Connecticut, “reasonable” non-compete agreements are enforceable. But that means several details will have to be reviewed to determine validity: Is it too long or too restrictive? Is it fair? Does it prevent the employee from making a living?
Your lawyer will guide you down the right path.
(Joseph M. Pastore III is Chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at (203) 658-8455 or jpastore@pastore.net.)