As employees are returning to the office and the job market is returning to highly competitive levels, questions about noncompete agreements have come to the forefront. The most common question is – are these things really enforceable?! The short (and very “lawyerly”) answer is “it depends; but if drafted correctly then they certainly can be.” So whether you are a company considering whether to implement noncompete agreements or an employee trying to determine if their agreement is enforceable, here are six key questions to ask:
1. Is it just a noncompete?
The word “noncompete” is the term that is typically used (and misused) in this context. In reality, most agreements contain a series of “restrictive covenants” which is the umbrella under which noncompete and other similar provisions fall. For example, most restrictive covenant agreements preclude an employee from: competing in a particular capacity, geographic area, and time period; soliciting business from particular customers; soliciting or inducing employees to leave the company; and maintaining the confidentiality of company information. So the first step is to determine what activities are actually being prohibited by the agreement.
2. Which state law applies?
This is a crucial question. In virtually all situations involving restrictive covenants, enforcement is a matter of state law. And the states are very different. Some states favor restrictive covenant agreements, while others take the position that these types of agreements are illegal. In Indiana, restrictive covenants are generally disfavored, but can be (and are) enforced if drafted properly.
3. When does the noncompete have to be signed?
In Indiana, there is no requirement on timing. Employers can have employees sign these agreements before employment, at the beginning of employment, or during employment. However, again, this is a matter of state law. For example, in some states, restrictive covenants cannot be signed before employment begins. On the other hand, in other states, restrictive covenants cannot be signed after employment begins unless additional compensation is provided to the employee.
4. Does the company have to give extra?
In Indiana, an employer does not have to give extra compensation to an employee for a restrictive covenant to be enforceable. Courts have determined that at-will employment or continued employment is sufficient consideration for a restrictive covenant to be enforceable. However, other states do require that employees receive additional compensation in order for these types of agreements to be enforced.
5. Is the agreement tailored to your business/industry?
In order to be enforceable, an agreement must be tailored to the particular business or industry such that it seeks to protect a worthwhile business interest. Courts have found that protecting a company’s confidential information or trade secrets is a good reason for a restrictive covenant. Similarly, protection of relationships with customers has been found to be enough to enforce a restrictive covenant.
6. Is the agreement one-size-fits-all?
All employees, regardless of salary or responsibility level, should not sign the same agreement. Courts are more likely to enforce a longer, comprehensive agreement against executive-level or tech/R&D employees. On the other hand, rank and file employees should sign shorter and less restrictive agreements to increase the chance of enforcement by a court.
Each analysis of a noncompete agreement is unique to the employee, the industry, and the governing law. However, asking these questions is a good start for employers and employees alike when evaluating whether their agreements are enforceable. That said, this is a particularly tricky area of employment law and you should consult a specialist for a detailed review.
ADAM BARTROM is a partner the Labor and Employment Department of Barnes & Thornburg LLP’s Fort Wayne office. He can be reached at email@example.com or 260-425-4629.