Overuse of non-compete agreements can backfire on businesses, P.1

In our last post, we began looking at some of the general requirements of non-compete agreements. We have specifically mentioned the requirements of consideration, protection of a valid business interest, and reasonableness of duration, geographic area, and the scope of activities prohibited.

Another important consideration for businesses in drafting and negotiating non-compete agreements is the status of the employees on which they seek to impose non-compete agreements. Ordinarily, businesses reserve non-compete agreements for employees that present a higher risk of misappropriating valuable business information. Increasingly, though, businesses are choosing to impose non-compete agreements on lower-level employees. 

The logic behind imposing non-compete agreements on low-wage employees is partly based on the shift in the economy from goods-based to service-based. In such circumstances, there is a greater likelihood of lower-level employees coming into contact with valuable information about client relationships. Another factor is the ease with which technology allows for misappropriation of valuable business information. Increased competition for talent is also a factor.

For businesses making use of non-compete agreements for lower-level employees, it is important to be cautious about the terms of these agreements. Generally, restraints on trade are disfavored, and overuse of non-compete agreements can backfire on a business when they end up not being enforced in court. Deciding which employees should be subject to such an agreement is closely tied to the requirement that these agreements are aimed at protecting valid business interests.

An agreement which mostly just does harm to an employee and which is part of an overly-protective or aggressive business strategy is not likely to be upheld in court. We’ll say more about this in our next post. 

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