Non-Compete Agreements Generate Debate
After months of debate this year, the Massachusetts Legislature left that state’s laws concerning employee non-compete agreements undisturbed.
The arguments generated by the proposed legislation in that state are similar to those that have been made across the country as well as here in South Carolina. They are worth taking a closer look.
Pros and Cons of Non-Competes
Non-compete agreements (often called non-competes or NCAs) are contracts that people typically are asked to sign when they are hired by a company or firm. These agreements tend to place restrictions on where a person can work for a certain number of years after they leave the company.
For example, a computer software salesman may sign an agreement that restricts him from selling software within a 20-mile radius of Spartanburg during the two years after his employment at the company ends.
Non-competes have become increasingly common in the technology, medical and sales industries, where new ideas and client lists can give companies a big edge on their competitors.
According to the Boston Business Journal, one lawmaker pushing for limits on non-competes in Massachusetts argued that they keep wages low, send talented workers out of state and hurt innovation and economic development.
Conversely, those opposing restrictions on non-compete agreements contended that the agreements can play an important role in protecting companies from losing trade secrets as well as clients when an employee leaves.
A final version of the proposed legislation would have required companies to present non-compete agreements at hiring or within five days before employment. The bill also would have placed a six-month limit on post-employment restrictions found in non-competes and prohibited companies from requiring hourly employees to sign them.
Non-Compete Agreements in South Carolina
In South Carolina, legal disputes often arise when an employee leaves and goes to work for a competitor or strikes out on his or her own. The former employer will sue to enforce the non-compete. The employee may respond by arguing that the agreement is invalid.
To resolve the dispute, courts will apply a five-factor test that looks at whether the agreement:
- Is supported by valuable consideration: If a person receives a job based on signing a non-compete, that could be deemed valuable consideration. However, merely telling an employee that he or she can keep a job by signing the agreement – without offering an increase in pay or a new contract – likely would not stand up in court.
- Is vital to protecting legitimate business interests: For instance, if a software company is worried that an employee could provide trade secrets to a competitor, a non-compete could hold up.
- Is limited in time and place: If a non-compete restricts employees for an indefinite length of time or keeps them from working outside the company’s normal geographic scope, they could be considered invalid.
- Will hinder a former employee’s ability to earn a living: If a non-compete requires an employee to move away or enter an entirely new line of work, it may also lean toward the agreement being deemed invalid.
- Reasonable for public policy: Non-competes placing a stringent penalty on an employee or hurting a community’s ability to obtain important goods and services could violate good public policy.
As the recent debate in Massachusetts shows, non-competes are controversial – but ultimately here to stay.
If you are an employer or employee who is facing a legal issue concerning a non-compete, it will be important to seek experienced legal assistance.