While not new, noncompete agreements remain a source of dispute because both the workforce and terms within the agreement are continuously evolving.
Covenant not to compete are most often designed to restrict an employee’s ability to work for a competing business in a relevant geographical area for a period of time after employment ends. Although state law varies, a noncompete agreement has the best chance for enforcement if it protects a legitime interest of the business and is reasonably limited in time and geographic scope.
A fenestration company asking its employees to sign a noncompete should consider several factors when drafting an agreement.
- Identify and state a legitimate business interest. Trade secrets, intellectual property and customer lists are commonly identified legitimate business interests applicable to the fenestration industry.
- Include a reasonable geographical and temporal scope. When asking a salesperson to sign a noncompete, consider which markets overlap with competitors. It is likely unreasonable for a fenestration company selling predominantly on the west coast to restrict the employee from finding employment with a fenestration company selling predominantly on the east coast. Also, the restriction cannot last an unreasonable amount of time; several months seems likely reasonable, but five years is probably not.
- Consider providing distinct consideration to an employee who is asked to sign at any time other than at the time of hire. This means giving the employee something of value in exchange for the employee’s agreement to sign the noncompete, such as a raise, new title and responsibilities, or new benefits.
- Only ask employees who receive protected information to sign. Make sure to review signed agreements periodically to ensure that the terms continue to adequately protect a legitimate business interest. Consider updating the agreement if the employee has taken on additional or different roles since the initial signing.
- Consider a contractual choice of law provision. As enforceability depends on state law, this could end up being one of the most important terms in a noncompete agreement. An agreement enforceable in one state could just as easily be unenforceable in another state.
- Draw up a document that is specific to your business and the position of the employee who will sign. A court will be more likely to strike a noncompete agreement that is overbroad or sloppily written.
- Be fair and act to protect truly substantive confidential information for as short a time as actually required. Word spreads fast and company reputations are always in play.
A noncompete agreement can protect a fenestration company from former employees sharing important information with a new employer, but a poorly drafted agreement can end up costing the company more than just the valued information if it is challenged and a court finds it unenforceable as written.
