New Law May Affect Existing Non-Competition Agreements
A non-competition agreement is an agreement in which an employee promises not to work for a competitor for a specified period of time after leaving the company in exchange for employment or continued employment. In today’s increasingly competitive job market, this type of an agreement is becoming more prevalent. Non-competition agreements are now commonplace for many jobs within the construction industry.
Historically in Idaho, non-competition agreements that are carefully drafted to protect employers’ legitimate business interests are enforceable. Many provisions commonly found in these agreements, however, are the subject of significant litigation. On July 1, 2008 new legislation went into effect to add certainty to the enforceability of these agreements. Under the new law, an employer may require a “key employee” to execute a non-competition agreement prohibiting the “key employee” from working for a direct competitor for up to eighteen (18) months after employment is discontinued. A “key employee” is an employee whose knowledge of the employer’s business operations, customers, and other business relationships might allow the employee to harm or threaten the employer’s legitimate business interests if the employees were to go to work for the employer’s competition. Any employee among the highest paid 5% of the employer’s employees is presumed to be a key employee.
“Legitimate business interests” are now defined by statute to include “good will, technologies, intellectual property, business plans, business processes and methods of operation, customers, customer lists, customer contacts and referral sources, vendors and vendor contacts, financial and marketing information, and trade secrets.” An employer may properly seek to protect each or any of these business interests through non-competition agreements.
A non-competition agreement must be reasonable in duration, geographical area, and includes restrictions on the type of employment. The law creates legal presumptions with respect to each of these areas. A non-competition agreement prohibiting employment with a competitor for eighteen (18) months or less is presumed reasonable. A non-competition agreement prohibiting employment within the geographic area in which the key employee provided services or had a significant presence or influence is presumed reasonable. A non-competition agreement prohibiting future employment of the type conducted by the key employee while working for the employer is presumed to be reasonable.
An employer may also increase the duration of a non-competition agreement beyond eighteen (18) months, so long as the employee is given some agreed-upon benefit or payment in exchange for the extended duration. The statute does not quantify how much of a benefit or payment the employer must give the employee in exchange for the extended duration.
All employers should review the language of their non-competition agreements to ensure compliance with the new statutory framework. When reviewing your non-competition agreement, consider the following recommendations to minimize potential legal challenges:
1. Your agreement should be carefully drafted to protect only those business interests that are at risk if the particular employee were to go to work for the competition. Employers have a tendency to try to create broad protection by using over-inclusive provisions. Unfortunately, overbroad provisions can leave you with no protection at all if the agreement is not unenforceable.
2. Make sure that your agreement does not contain blanket prohibitions against working for a competitor in any capacity or within any geographic region.
3. Make sure that your agreement is clear. Ambiguities in non-competition agreements have historically been construed against the employer and in favor of the departing employee. The new law is unlikely to change this rule of interpretation.
4. Consider including a liquidated damages provision in your agreement. A liquidated damages provision can establish a predetermined amount that the company will be damaged by a particular employee going to work for the competition. One of the difficulties of enforcing non-competition agreements can be establishing the dollar amount that the company is actually damaged by a departing employee. A liquidated damages provision may help eliminate the necessity of proving actual damages.
5. When hiring a new employee, consider inquiring whether the potential employee has signed a non-competition agreement with any former employer. Failure to do so may cause you to end up embroiled in litigation over the former employer’s non-competition agreement.
In the event a court determines that the duration, geographical area, or type of employment in a non-competition agreement is unreasonable, the new law authorizes the court to re-draft the provision to make it reasonable. While this decreases the likelihood that an agreement will be determined to be entirely unenforceable, employers should not view this as a reason to make these provisions over-broad. Overly broad provisions make an agreement intrinsically susceptible to legal challenge. Moreover, the employer may have less protection after the court re-drafts the agreement than the employer would have had if the agreement was properly drafted in the first place. If your business interests are legitimately worth protecting, then you should have your non-competition agreements drafted with particularity to protect these interests with certainty.