The A, B, Cs of a Non-Compete Agreement
Non-compete agreements are contracts between employers and employees, in which employees agree not to enter into competition during or after employment. Employers use a non-compete agreement to prevent an employee from directly competing against them in another position, whether they start up their own business or work for a competitor within the same market. Non-compete agreements can also be used to protect employers from former employees revealing sensitive or secret information. However, it is also not uncommon to use a non-compete agreement between business partners or when a business is sold. This prevents the value of a newly sold business from being impacted if the previous owner takes their skills and experience to set up another business in direct competition.
What’s Included in a Non-Compete Agreement?
Overall, any non-compete agreement must be fair and equitable for both parties. There is certain information required to ensure that it is legally binding, including:
- An effective date to start the agreement
- A reason for the agreement to be enacted
- Specific dates when the employee will be barred from competing and the location covered
Details of the compensation for agreeing to the contract terms.
Enforcing a Non-Compete Agreement
There is a common misconception that employers in New Jersey cannot enforce non-compete agreements. While many employers do not seek enforcement of non-compete agreements due to the litigation costs, a non-compete agreement can be enforced if it meets the legal requisite standards.
There are two typical situations where non-compete agreements can be executed- sale of a business and employment. Here in New Jersey, the courts are less motivated to enforce an agreement incidental to employment compared to one incidental to a business sale. This is because there is a strong public policy in New Jersey to afford individuals the right to work.
Regardless of the reason to execute a non-compete agreement, the reasonableness of the restrictions will be analyzed to determine if it should be enforceable. For an agreement to be enforceable, the court requires that it protects the employer’s legitimate interests, does not impose undue hardships on the employee, and it also not injurious to the public.
While there are no legitimate interests to prevent competition, an employer does have a legitimate interest to protect confidential information, customer relationships, and trade secrets. So, an employer may see to restrain employees from soliciting the same customer relationships after leaving their position.
Non-compete agreements will not impose undue hardships if it is reasonable in the subject matter, duration, and geographical area. Additionally, the court is less likely to find there is undue hardship if the employee quits their position rather than being terminated by the employer, but this not determinative to the ultimate decision to enforce.
Finally, the court will assess whether the agreement is injurious to the public. This will involve an intensive inquiry that investigates aspects, including the effects of the agreement on the availability of services or goods within the industry and corporate investment in long term research and development programs.
Each non-compete agreement is different and will require skilled New Jersey attorneys to analyze the terms and review it to determine if it is enforceable. If you have a non-compete agreement, our team is available to provide advice and counsel, so contact us to schedule your consultation.