Many industries use non-competition agreements, also known as non-compete agreements, as a means to protect company information from a departing employee. In fact, some of you reading this may be subject to one. A non-compete agreement is a contractual restriction on an employee’s ability to compete with a former employer. The benefits of a properly drafted non-compete agreement are obvious: to protect the company from a key employee taking sensitive company information to a competitor or using that information to start his or her own competing company. However, under Pennsylvania law, overly broad non-competes are often considered unenforceable, so they need to be narrowly tailored to protect the legitimate business interests of an employer.
While the concept of non-compete agreements is fairly straightforward, drafting an enforceable agreement that adequately protects your company can be challenging. The first step to drafting an enforceable non-compete agreement is to identify which employees should be subject to the restriction. As a general rule, non-compete agreements should not be used for all employees. Instead, employers should identify key personnel in the company that have regular and consistent access to trade secret or confidential company information or those people within the organization that have unique or special skills specific to the business.
Once the key personnel are identified, the non-compete terms should be well thought out. In Pennsylvania, non-compete agreements must be reasonable in both duration and geography. This can mean that the terms will differ between key personnel. For example, a CEO may be prohibited from competing with a former employer for a period of 2 years within 200 miles of company headquarters. That same duration and geographic scope may be unreasonable for a project manager who works solely in the Central Pennsylvania market.
The scope of the agreement should also be limited to the type of business the employer engages in or is reasonably expected to engage in. A sales representative for a specialty trade subcontractor should not be contractually prohibited from accepting a sales position in a completely different industry. It is also important to clearly identify when and under what circumstances the non-compete is triggered and explain how the employer is to be compensated for the employee’s breach of the agreement.
Traditionally, non-compete agreements are included in an employment contract that is reviewed and signed upon acceptance of employment. However, circumstances arise where, at the time of hiring, it is unclear how valuable that employee will become to the organization. In Pennsylvania, non-compete agreements entered into after the employment relationship has already begun are permissible, but only if offered in conjunction with a promotion, raise, bonus, etc. Unlike other jurisdictions, the promise of continued employment in exchange for an employee’s acceptance of a non-compete agreement will render the non-compete unenforceable.
When considering whether non-competition agreements can help your company, remember that one size does not fit all. Unfortunately, many companies resort to the use of online templates for cost saving reasons. However, a poorly drafted non-competition agreement is at risk of being unenforceable, leaving your company unprotected from the departing employee.
Posted November 1, 2022