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What happens when a worker violates your non-compete agreement?

Your employees keep your company running, allowing you to provide services or turn out products that generate revenue. With each new hire, you increase your company’s capacity for earning money. However, you will also increase your company’s overall liability and the risk of a worker’s behavior impacting your success.

Are non-compete agreements enforceable?

Mistakes and misconduct by your workers can cost your company money while they work for you and even after they leave your company. They could cause injury to themselves or other workers, create a toxic workplace with bad conduct or even make mistakes that affect your customers and clients.

You may have tried to limit the risk involved with hiring a worker by having them sign an employment contract. The rules in that contract allow you to punish and terminate workers who engage in unsafe or inappropriate conduct. Many employers also want to include restrictive covenants in their employment contracts.

Why restrictive covenants are so common

A restrictive covenant is a contract or agreement that prevents someone from engaging in a specific behavior. Non-compete agreements are popular employment contract solutions that prevent a company’s workers from going to work for a competitor or starting a competing business right after they leave a company.

If a worker breaches a restrictive covenant, they may be subject to financial penalties. However, you will have to go to court to impose that penalty. Can you take a worker to court if you believe that they have violated the non-compete agreement in their employment contract with your company?

States increasingly disfavor or refuse to enforce non-compete agreements

Over the past decade, state and federal governments and courts have taken an increasingly antagonistic view toward non-compete agreements. In states such as California and Oklahoma, non-competes are void ab initio except for a handful of extremely narrow exceptions. In other states like New York, North Carolina, and South Carolina, non-competes are strongly disfavored as a restraint on trade, and are strictly construed against the employer. Many states also ban non-competes based on profession, industry, or income level. For example, New Jersey, Colorado, and New Mexico statutorily prohibit such contracts for one or some combination of the following: physicians, dentists, psychologists, certified nurse practitioners, etc. Illinois’s Freedom to Work Act, effective January 1, 2022, bars non-competes unless the employee’s actual or anticipated rate of earnings exceed $75,000 per year.

While you could potentially go to court to enforce less common restrictive covenants in California, the courts will not uphold a non-compete agreement. Prior rulings in California have clarified that the courts will not take punitive measures against workers who start their own companies or go to work for a competing business. Even non-compete agreements that include reasonable restrictions, such as only being applicable in a small geographic area, may still have little effect on a worker’s behavior after they leave your business. Learning more about the rules that apply to California businesses can help you better protect your company’s interests.

However, although courts generally disfavor non-competes and find reasons to refuse to enforce, non-competes that are reasonable and intended to protect an employer’s legitimate, protectable interest may nevertheless be enforceable in certain states. In New York, courts evaluate non-competes on a case-by-case basis. A non-compete may be enforceable if the employer is able to demonstrate that it is no greater than required to protect the employer’s legitimate protectable interest, does not impose undue hardship on the employee, does not cause injury to the public, and is reasonable in duration and geographical scope. Courts may also blue-pencil covenants that it deems to be too broad. For instance, whereas the geographical scope of 5 miles may be reasonable in the Catskills, the same restriction would not be reasonable in Manhattan. A court may enforce the latter agreement, but reduce the geographical scope to a handful of blocks. In other words, courts may pare down unreasonable restrictive covenant such that enforcement of the result is relatively meaningless.

New Jersey uses a three-prong test. Non-complete agreements must be reasonable in scope and duration, and employers must show that the restrictions are necessary to protect the employer’s legitimate interests, do not cause undue hardship on the former employee, and is not against public interest. Even in this relatively lax environment, New Jersey courts generally disfavor restraints on trade, and restrictive covenants are narrowly construed against employers.

The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the lawyer with whom you normally consult. No attorney-client relationship is created by this post.

For more information or advice concerning non-compete agreements, please contact Daniel TeJumson.