Non-Compete Clauses: A Primer
What is a Non-Compete Clause?
A non-compete clause (NCC), also known as a restrictive covenant or covenant not to compete (CNC), is a provision in a contract that restricts one party (usually an employee) from engaging in competition with the other party (usually the employer) for a specified period after the termination of their employment.
Legal Enforceability of Non-Compete Clauses
The enforceability of non-compete clauses varies depending on the jurisdiction and the specific terms of the clause. In most jurisdictions, courts will only uphold non-compete clauses if they are reasonable and necessary to protect the legitimate business interests of the employer. Factors considered in determining the reasonableness of a non-compete clause include:
- The duration of the restriction
- The geographic scope of the restriction
- The scope of activities restricted
- The consideration provided to the employee in exchange for the restriction
When Non-Compete Clauses are Enforceable
Non-compete clauses are most likely to be enforced when they protect the employer from unfair competition by former employees who have access to confidential information, trade secrets, or customer relationships. For example, an employer may have a legitimate interest in preventing a former salesperson from soliciting customers that the salesperson became familiar with while working for the employer.
When Non-Compete Clauses are Not Enforceable
Non-compete clauses will not be enforced if they are unduly restrictive or if they violate public policy. For example, a non-compete clause that prevents an employee from working in any industry related to the employer's business for a period of years after termination may be deemed unreasonable and unenforceable. Additionally, non-compete clauses will not be enforced if they are used to restrain trade or prevent employees from earning a living.
Conclusion
Non-compete clauses can be a useful tool for employers to protect their legitimate business interests. However, it is important to carefully draft non-compete clauses to ensure that they are reasonable and enforceable. Employees should also carefully consider the terms of any non-compete clause before signing an employment contract.
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