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Non-compete mistakes employers should consider

On Behalf of | Nov 26, 2021 | Employment Contracts

Non-compete mistakes employers should consider

Illinois businesses commonly require their employees or parties from whom they purchased a business to sign non-compete agreements. The contracts help companies protect trade secrets, client lists, and other critical business assets.  Whether an employer can enforce a non-compete agreement depends on the existence of an interest subject to protection and the enforceability of the restrictive covenant. Employers who draft non-compete agreements carefully can avoid losing a lawsuit and suffering financial losses. An employer might be tempted to create numerous restrictions when drafting the non-compete agreement; however, certain limitations create issues concerning enforcement.

While the discussion below focuses on employees, a business may buy a company and have former owners sign non-compete agreements.  The purchasing entity could suffer considerable losses if the former owners start a competing company.  The same considerations will apply.

Prolonging the restriction period

A non-compete agreement must specify the period during which the business can enforce the contract.  One common mistake a company should avoid concerns making the restriction period too long after termination of employment or not including specific dates in the non-compete agreement that specifies when the contract expires.  A court will enforce a restrictive covenant only if the period is reasonably necessary to protect the employer’s legitimate business interest.  This determination necessarily turns on the facts of each case.

Not having a consideration clause

An employer must provide its employees with something in return for non-compete agreements. In other words, it cannot ask employees to sign non-competes without giving something of value in exchange.  Otherwise, a court could refuse to enforce the non-compete agreement because it lacks consideration or would not consider it “fair.” Agreeing to provide continued employment is sufficient.  However, situations may occur where a business has an employee sign a non-compete agreement and terminates that individual shortly after that.  While no bright line exists, several states view two years after signing a non-compete sufficient if an employee is fired.

Broadening the territory too much

It is important to note that non-compete agreements are territorial restrictions. A territorial restriction must relate to the states or regions in which the company operates.  If an employer’s customers are situated within a limited geographical area from its headquarters, a court would view a nationwide limitation as unreasonable and not reasonably necessary to protect the employer’s legitimate business interest. If an employer has a non-compete agreement that is too broad in its territory, it may have trouble convincing the court that enforcing the non-compete would be reasonable and non-discriminatory.

Not Including a restriction on the use of trade secrets

Employers should understand that its purpose in having an employee is to protect trade secrets, including financial data, clients, processes, pricing or cost information, or other information vital to business operations. Therefore, the contract term that defines the trade secrets will be critical to protecting the business from improper competition.

Not having non-compete agreements updated as needed

Employers should always keep non-compete agreements up to date. Just because a non-compete agreement might have been enforceable when the employee signed it does not mean the same will be true two years later. Non-competes can change over time due to changes in state law or court rulings that invalidate non-compete agreements. Avoid any surprises by ensuring that non-competes are always valid and non-discriminatory.

If an employee leaves a company and subsequently returns, the employer should require that the employee sign a new agreement. However, a possibility may arise that the employee had been gone long enough that the period expired, and the employee would not be subject to any restriction when they left a second time.

There are other mistakes that employers make, but these are the most common ones. Review them and make the necessary changes or additions if you are in the process of drafting non-compete agreements for your employees. Always remember that every contract must be reasonable and enforceable.