The Necessity and Enforceability of Non-Compete Agreements
October 28, 2020
The Necessity and Enforceability of Non-Compete Agreements
In this current age of technology and highly-proprietary information, many employers are requiring that many senior-level employees, and in some cases all employees, sign agreements that preclude them from working for their competition for a specified period of time after their employment has ended.
Non-compete agreements are often subject to scrutiny regarding their enforceability, especially in “Right to Work” states like Arizona. In Arizona, courts employ freedom of employment-based standard when determining the enforceability of a non-compete agreement.
Non-competes are usually found to be enforceable in Arizona as long as they are not overly broad. The focus of a non-compete should only be that which is necessary to protect an employer’s legitimate business interest.
Why Do Employers Use Non-Competes?
To protect confidential information: Non-compete agreements can prevent employees from taking sensitive information to a competitor. During employment, employees are often given access to company secrets or sensitive information about operations, clients, pricing, methods and practices, future ideas, and marketing campaigns.
To reduce attrition rates: Often where an employee has signed a non-compete agreement, they are less likely to hop from position to position. They will put more thoughtful consideration into leaving and when they do leave, they generally provide more notice and leave on better terms.
To feel more confident about financing costly training: When an employee feels invested in, the chances of that employee taking the skills learned and funded by your business to another company are lower. This gives employers incentive to invest in special training or education as a benefit of employment. This also helps with facilitating an environment of internal promotion.
While these are great benefits, employers should keep in mind that non-competes can also have the effect of limiting your pool of applicants when hiring, as some people will not agree to sign one as a condition of employment.
Enforceability of Non-Compete Agreements
Though non-compete agreements can be an effective way to protect your business and maintain staff, the enforceability of these agreements is based on the extent of their necessity and the impact they will have on the employee’s future employment prospects.
To be enforceable the court will look at whether it holds up to the following factors: 1) a legitimate business purpose; 2) benefit received by the employee in exchange for the agreement; 3) the reasonableness of the agreement’s time and scope; and 4) whether the agreement violates public policy.
Legitimate Business Interest: Generally, as an employer, you will be required to provide a justification for requiring the non-compete. Common reasons are protection of proprietary information and intellectual property as well as maintaining the confidentiality of client lists, suppliers, and product information. The industry you work in will also be considered. It is more likely that a non-compete will be enforced in an industry where intellectual property and unique ideas are widely utilized as opposed to areas of less-skilled labor.
Employee Benefit: You must be able to show that your employee received some benefit in exchange for signing the non-compete. Typically, if the non-compete was present prior to the employee’s hiring, you can simply assert that the employee received the job as their benefit. If you are requesting that an existing employee sign a non-compete then the requirement can likely be satisfied by offering a pay increase, promotion, or raise in exchange.
Reasonableness In Scope and Time: The reasonableness of scope and time will largely depend on the industry in which your non-compete will apply. Industries that are very niche and that tend to hire and rehire from the same pool of applicants will likely have an easier time enforcing a non-compete. Whereas industries with a heavily saturated workforce, such as retail or food service, may not be able to enforce a far-reaching non-compete.
Regarding time, courts will not enforce an agreement that is unnecessarily long. Six months to a year is relatively common in most industries. A widely used rule-of-thumb is limiting time to how long it might reasonably take you to train a replacement.
For scope, reasonableness will depend on geographic area and actual work tasks performed by the employee. Sometimes a statewide prohibition makes sense and in other cases, limitation to your specific city is more reasonable.
Does Not Violate Public Policy: Examples of non-compete clauses that violate public policy would be clauses that completely prevent an employee from working in their chosen profession or those that deprive the public of an essential service, for example, public health care. Where an agreement hinders industry growth and public development the likelihood of enforcement is slim.
Drafting An Enforceable Non-Compete
In recent years, it seems employers are more likely to enact litigation as a means of enforcing non-compete agreements than employers of the past. The Wall Street Journal shared that the number of cases litigating non-compete agreements increased by 61 percent from 2002 to 2013. As such, it is more important than ever that you draft your agreements a way that will enable them to pass the court’s enforceability test.
Here are some tips for Arizona employers to keep in mind when considering non-compete agreements.
– Be sure the employee receives consideration (value) in exchange for signing the agreement.
– Demonstrates a legitimate business interest in the agreement
– Address the issues of scope, time, and public interest
– Define and identify what kind of information is confidential and make sure it is consistently treated as confidential during the course of your business.
– Make your agreement consistent amongst employees with similar jobs and access
Lastly, keep in mind that Arizona courts reserve the right to “blue pencil” non-compete agreements. This means that they can, and will in most cases, remove unreasonable provisions from your agreement, but may render the rest of the agreement enforceable.
If you have questions regarding the enforceability of your non-compete or would like help drafting one, we recommend you consult with an attorney.
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