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Non-compete agreements

June 12th, 2018 hrsimple

One of the most problematic parts of ending an employment relationship is what happens afterwards. While it is clear that the employee must go in a new direction, there can be some confusion as to what an employer can do to make sure its business interests aren’t negatively impacted. When an employee relocates or goes out on their own they may want to take clients, staff, information or ideas with them, but there are a few things employers can do to safeguard these valuable assets.  

Non-compete agreements

One way employers can protect themselves is by having employees sign non-compete agreements –agreements that prohibit the employee from competing with his or her employer during and after termination of employment. 

Absence of a non-compete agreement, a company’s former employees are free to:

  • immediately work for a competitor
  • solicit their former employer’s customers and employees
  • disclose confidential information that does not rise to the level of a trade secret. 

There are a few guidelines employers must follow to make these agreements enforceable, and also to protect an employee’s ability to find work post termination.  

Be reasonable in geographic scope and duration.

The restrictions must be reasonable as to the length of time and geographic area. Generally, the greatest danger of employees working for the competition happens in the months immediately following termination, therefore non-compete agreements that restrict employment for a period of longer than two years may be declared invalid.  Although not universal, agreements of one year or less are generally held to be acceptable.  

Protect a legitimate business concern

Restrictions in a non-compete agreement must protect legitimate business concerns in order to be enforceable.  Most states require employers to prove a legitimate business interest that goes beyond merely not wanting to compete with an ex-employee.  The definition of a legitimate business interest that is sufficient to support a non-compete varies, but may include the protection of trade secrets, prevention of an employee’s release of confidential information regarding the employer’s customers, or an employee’s services to the employer that are deemed special or unique. 

Other factors affecting enforceability

Some courts have also looked to other factors, including whether the agreement will essentially prevent the employee from working in his or her chosen field, whether the restriction will cause the employee undue hardship, and whether the employer has enforced non-competes against other employees. In general, enforceability can be judged on what is overall fair to both the employer and employee. 

Trade secrets

A trade secret is information that derives economic value from being generally unknown to others who can obtain economic value from its disclosure or use, and is the subject of reasonable efforts to maintain its secrecy. Trade secrets work hand-in-hand with non-compete agreements to protect employers in that they are the information that is being protected by such agreements. Trade secrets are protected under the laws of every state in the United States.  Even where an employer does not have a written contract with an employee governing the protection of trade secret information, the employer’s trade secrets are protected by statute or under the common law. 

Trade secrets are generally defined as information that: 

  • is not generally known in an industry
  • derives economic value by virtue of its secrecy
  • is the subject of secrecy efforts that are reasonable under the circumstances. 

Generally, for information to qualify as a trade secret, the employer must make an effort to maintain the secrecy of the information.  Here are a few examples of what employers can do to protect their trade secrets:

  • conduct proper background checks on new employees 
  • label trade secrets prominently with “confidential” or “proprietary”
  • limit distribution of documents to “need to know” or “need to use” personnel
  • limit access to computer areas and computer systems
  • install screen savers and server passwords to protect computer systems
  • place restrictions on photocopying through the use of logs or central photocopying
  • use document destruction systems such as in-house shredding
  • conduct exit interviews for every departing employee to make sure that all trade secrets or confidential information remain with the company and to reemphasize the duty of confidentiality to these employees.

Non-compete agreements and trade secrets in hiring

Most employers think of non-compete agreements and trade secrets as subjects only considered in the context of protecting a company from unfair competition by others.  However, this is a far too narrow view.  Considerations should be made during the hiring process as to whether or not the applicant might be held under any restrictions based upon prior employment.  Not only could such restrictions limit the suitability of the individual for the new job, but could also result in having the new employer dragged into court as a defendant in a claim for unlawfully interfering with the prior employer’s rights.  Care should always be taken to ensure that an overly enthusiastic new hire does not upload files or other documents onto the new employer’s computer system that were wrongly acquired from a prior employer.