Ongoing concerns about the strength of the U.S. economy signal the likelihood that some companies will continue to shed jobs as they recalibrate to move forward — and that means a new wave of professionals will confront the effects of noncompete clauses.
Employment contracts and separation agreements are prepared by employers and, not surprisingly, generally contain provisions intended to protect the employer and the employer’s business.
Professionals who are joining or leaving a company are typically prohibited from disclosing the employer’s trade secrets, intellectual property, customer or client lists, product specifications and other information deemed proprietary. The reasonableness of such limitations isn’t difficult to understand or accept.
However, most employment contracts also contain some form of a covenant prohibiting an employee from competing against the employer — even if the employee is retiring or resigning or is being fired.
Wait a second: a mid- to upper-level manager who is resigning can’t improve his or her life by taking a better job with a direct competitor? Isn’t that how you succeed in the business world, by moving around to move up?
Even more difficult for many to understand is how an employee whom a company devalues enough to fire can also be handcuffed by the terms of a typical noncompete clause. (Wouldn’t the employer want such an employee to go to a competitor, a cynic might wonder.)
Nevertheless, a noncompete provision typically prohibits a former employee from going to work for another employer who is a competitor of the employer and usually prohibits the former employee from hiring other employees from his former employer. Some noncompete provisions preclude a former employee from starting his or her own business in competition with his former employer.
The strict nature of noncompete clauses might seem unreasonable enough to suggest that their primary function must be to serve as a deterrent and that those willing to test the will of the former employer are unlikely to face action. However, that is not the case.
There have been a number of lawsuits brought by employers against former employees who have allegedly violated noncompete provisions in their employment contracts. Some noncompete provisions are upheld and some are found to be invalid. Recently, for example, a federal district court judge found a noncompete provision to be void and unenforceable because it was “unrestricted in geographical scope.” The provision was to be effective for two years and it would have prevented the former employee from working in his field anywhere in the world. The court’s decision emphasized that the noncompete provision would have prevented the former employee from pursuing his occupation for a period of time that was manifestly unfair and against public policy.
When considering the reasonableness of a covenant not to compete, courts may consider:
- The length of time the covenant will be in effect.
- The geographical area within which the former employee is prohibited from working.
- The fairness of protection to the employer.
- The extent of the restraint on the former employee’s opportunity to pursue his occupation.
- The extent of interference with the public’s interests.
Most employees in Connecticut don’t have contracts and are considered “at-will” employees, meaning that employers can terminate their employment for any non-discriminatory reason at any time.
For those employees who are subject to contractual noncompete clauses, every case is different. The nature of employment is a factor in the enforceability of a noncompete provision and when cases go to court, two key aspects under scrutiny are the time duration and geographic limitations imposed in the noncompete clause. The level of hardship imposed on an employee is a key test.
If you are either an employer or employee about to be subject to an employment contract, we advise consulting with an attorney to evaluate the enforceability of the contract and its noncompete provisions.
Attorney Robert L. Fisher, Jr. is a partner with Cramer & Anderson, a regional law firm with five offices in Fairfield and Litchfield counties, including Danbury. He works primarily in Cramer & Anderson’s Washington Depot office and may be reached at 860-868-0527 or by email at .