Best Practices for Non-compete Agreements

When drafting enforceable non-compete agreements, general contractors should take the necessary steps to ensure that restraints imposed are not more expansive than required for their protection, do not impose an undue hardship on the employee and are not injurious to the public. Failure to do so could result in a finding that the restrictive covenant is unenforceable.

The following factors are considered in determining if a non-compete is reasonable (and therefore enforceable):

• length of limitations as to time and space;
• whether the employee is the sole contact with the customer;
• whether the employee has confidential information or trade secrets;
• whether the covenant seeks to eliminate competition that would be unfair to the employer, or merely seeks to eliminate ordinary competition;
• whether the covenant seeks to stifle the employee’s inherent skill and experience;
• whether the benefit to the employer is disproportional to the detriment of the employee;
• whether the covenant operates as a bar to the employee’s sole means of support;
• whether the employee’s talent that the employer seeks to suppress was developed during the period of employment; and
• whether the forbidden employment is incidental to the main employment.

Consideration of all of these factors results in courts engaging in an inquiry that is intensely context driven.

When drafting an enforceable non-compete, keep in mind a legitimate business justification for the restrictions and state that justification in the agreement. Keeping the business justification in mind when drafting will help effectively link the restrictions to a stated reason, thereby prohibiting the court from substituting its business judgment for that of the general contractor.

In determining whether the limitations imposed are reasonable, courts make a fact-intensive inquiry into whether the restricted party is competing for business “the nature of which is similar to the business” of the party seeking to enforce the covenant. To do this, analysis of what clients the party is trying to solicit for business is necessary, and frequent reference is made to both the general contractor’s and the subcontractor’s website and marketing materials.

General contractors should be wary of attempting to establish a bright line restriction, and keep in mind that one size or provision may not fit all subcontractors with respect to time and space restrictions. A general contractor should consult with legal counsel in determining what level of restraint has been found appropriate for each subcontractor’s particular work. A time and space restriction for one subcontractor (that performs work substantially different to the work of the general contractor) may be reasonable, whereas the same restrictions for a subcontractor that performs different work from the general contractor may not be.

Courts may make reference to U.S. Census data to determine how many people are included in a space restriction, so the general contractors should take these considerations into account.

If a particular subcontractor’s talent or skill set that the employer seeks to restrict through a non-compete was developed during the period of employment, courts are more likely to enforce the restrictive covenant because of equitable considerations.

Savvy employers should make sure to impose length and geographic restrictions that are related to a business justification, as well as consult with legal counsel in developing language that draws the restrictions narrowly enough to make the covenant enforceable, while protecting the firm’s business interest. Moreover, employers should include language permitting the court to reform the length and time of the non-compete, in the event there is a determination that the non-compete is overly broad. Finally, in addition to non-compete clauses, employers should consider including non-solicitation components to their restrictive covenants, subject to similar restrictions for subcontractors that have frequent access to commercial property managers, property owners or general contractors.