Enforceability of Non-Compete Clauses —
A couple decades ago, non-compete clauses in employment contracts were not very common, only being used in high-level corporate contracts in order to protect confidentiality and secrets of those large companies. Today, however, non-compete clauses are almost a standard in employment contracts, used to protect all kinds of businesses from losing clients, employees and services when employees leave. Thus, these clauses have become a source of heavy litigation in New York State.
The general consensus is that these clauses are enforceable in employment contracts as long as they are considered “reasonable.” The Court of Appeals, New York’s highest state court, articulated a three-prong test in BDO Seidman v. Hirshberg in which to analyze the reasonableness of non-compete clauses. A clause is “considered reasonable if it is “(1) no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.” All three prongs must be met, and a violation of any of the three prongs will render the clause invalid and therefore unenforceable. Courts look at different factors of the non-compete clause mostly focusing on the terms of the agreement, including the time, activities and geographic scope specified in the clause.
Are Your Non-Compete Clauses Reasonable?
There are a couple simple steps to ensure that the non-compete clauses in your employment contracts will be found to be enforceable. The first factor, and arguably the most critical, is to pay attention to the breadth of the clause. Clauses that are found to be overbroad are almost always immediately struck down, as violating one if not two of the reasonableness test prongs. To do this, consider the terms mentioned above. When analyzing the time restriction specified in the agreement, courts have looked to industry standards in addition to whether the employee is restricted for too much time, preventing them from engaging in their chosen occupational field.
The geographic scope is also important in the court’s analysis. Clauses completely eliminating an employee’s potential to find other employment have caused issues in state courts. For example, if your business is located in New York, restricting your employee completely from working in the New York entirely is probably considered eliminating an employee’s chance to make a livelihood. However, if the geographic scope only restricts the employee to certain areas involved with the company’s industry, courts are more likely to uphold those clauses.
Finally, remember the activities in which you are trying to restrict. Restricting former employees from performing services outside of the company’s line of work have been held to be overbroad. For example, if you are an accounting firm, it is unlikely that a court will allow you to restrict a former employee from participating in legal work for another company.
The second area to focus on is the circumstances surrounding the termination of the employee. New York courts have generally held that employees fired without cause are not bound by non-compete agreements found in their employment contract. However, in some recent cases, the analysis does not seem as clear-cut as it once did. The Appellate Division for the Fourth Department held just this year in Brown & Brown v. Johnson that termination without cause does not automatically render a non-compete clause invalid. The Court of Appeals has not yet clarified this confusion among the state courts. However, the takeaway from this is that having a “reasonable” non-compete clause in employment contracts is always the best practice.
If you have questions regarding this article, including questions related to the enforceability of your non-compete clause, please feel free to contact The Wagoner Firm, PLLC for a free consultation.
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