ASK YOURSELF THESE 5 QUESTIONS BEFORE SIGNING A NON-COMPETE

This article summarizes important considerations that an employee or business must bear in mind before inadvertently or deliberately signing a non-compete agreement with an employer or business.

1) Am I signing a hidden non-compete agreement?

Employers will occasionally attempt to hide non-compete agreements inside employee contracts that contain an increase in salary, benefits, a severance package, or other consideration. The employer’s purpose in doing so may be to entice the employee into signing an agreement that includes a non-compete clause. Therefore, employees must think carefully before signing any document that even mentions the word “non-compete” because that document could have a drastic effect on their future employment opportunities.

2) How will I benefit from signing the non-compete agreement?

For a non-compete agreement to be considered valid, employees must receive some type of consideration. This consideration may be an employee bonus, stock options, a severance agreement, or salary compensation. As an employee, you may want to ask yourself, “Is the value/consideration I am receiving worth the potential consequences?”

3) What is the geographic scope of the non-compete agreement?

Courts are reluctant to enforce non-compete agreements in regions where a company does not operate. Courts in TN have held that the territorial limit “must be no greater than necessary to protect the business interests of the employer.”1 For instance, if a company does business solely in Tennessee, it is unlikely that the court would enforce a geographic restriction that prohibits employment in a neighboring state.

4) How long will the non-compete agreement be in effect?

This is perhaps the most important feature of a non-compete agreement. Generally, courts in Tennessee are reluctant to enforce non-compete agreements in excess of two (2) years. However, there may be certain situations where a court would enforce a non-compete agreement beyond two years.

5) Is this non-compete agreement enforceable in a court of law?

Most non-compete agreements include a “severability clause” which means that, even if a provision in the agreement is held to be unreasonable/unenforceable, the remaining terms of the agreement should remain in effect. For example, if an employee signs a non-compete agreement that is reasonable in geographic scope, has valid consideration, and meets all of the other necessary elements, but lasts for 5 years, the court will likely strike the 5-year provision and consider the other provisions valid.

In examining the validity of a covenant not to compete, courts love the word “reasonable.” If an employer can show the clause is reasonable, the court will likely enforce the clause. If the employee can prove that the provision is unreasonable, then it will likely be considered unenforceable. Before you sign a non-compete agreement or any document that contains restrictive covenants affecting your employment, you should seek experienced legal counsel in your state to review these documents.