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Zaku's avatar

How are non-competition employment agreements legally binding?

Asked by Zaku (12046 points ) June 23rd, 2010

Some employers compel employees to sign forms which say you agree not to work for similar businesses within a certain distance (5 miles) and/or time (2 years) of the time/place of employments. The one I’m looking at says that “violation of the terms… will result in legal action.”
There is no penalty specified. So, what would the potential legal action be? Seems to me the best they could do would be to use it for grounds to terminate your employment if they so chose.
Also seems like bullying that shouldn’t really be legal, and that it would limit one’s freedom to pursue happiness (i.e. unconstitutional).
The types of work I have seen for something like this have included administrative office work, and working as an instructor in a health club.
This is in Washington State (USA).

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13 Answers

JLeslie's avatar

Well, it is pretty common not to be able to hold a “second” job in the same business. It is a conflict of interest, and the company will either ask you to quit the other job, or might fire you. If it is a non-compete when you leave a job, stating you cannot work in that business for a year or two after you leave, that I am not sure what the penalty would be? Will be interesting to see the answers.

john65pennington's avatar

This type of case would be heard in civil court. this agreement is binding, if the employee agrees and signs the agreement. this type situation is really prevelant in the electronics field. what one company invents, it wants to keep secret. its all about money.

Merriment's avatar

They are a legal agreement and therefore legally binding….to a degree since every agreement can be taken to court for an independent ruling on it’s enforceability.

Law requires that they be “reasonable”. Meaning that the company’s interest in keeping their information/contacts, etc. private must be balanced against the individuals right to work. Any non-compete contract must be very specific in it’s limitations and not restrict the employee’s future options unduly. If the contract gets too restrictive they run the risk of the court throwing out the whole agreement.

They are not looking at this as something they will be enforcing while you are still working for them (although they could). They are looking at it as you have moved to a competitor and have taken trade secrets or contacts with you. What they will sue you for will be damages…which if you jeopardize a significant project could be considerable $$$.

It’s not unconstitutional but it is a gray area that is tricky to enforce

JLeslie's avatar

@Merriment It’s two separate things in my mind. A non-compete while working, and one if you leave the company. The one while working is more of a conflict of interest thing. Like someone who works at Macy’s cannot work at Sak’s at the same time, because the companies are direct competitors.

Merriment's avatar

They are the same basic concerns but one is a Non-compete and one is Moonlighting law.

And the Moonlighting would, of course, only be applicable while the person was still an employee of the company with a restriction against moonlighting.

Zaku's avatar

All the contract that I see now mentions is that the signer agrees, and it is a condition of employment. Seems to me like maybe it’s just they reserve the right to fire you, but there seems to be an unexplained threat in the “will result in legal action” part.

In the office case, the concern was mainly about loss of business know-how, and the employees were offended and refused to sign and the employer backed off.

In the health club case, I also know of employees who in fact do work at multiple nearby companies. I wonder what damage they could/would argue. Wondering if anyone has any knowledge or experience with examples.

ETpro's avatar

If you owned a company with millions or even hundreds of millions invested in R&D to bring out unique products no other company can offer consumers, and you hoped that investment would pay off in a big market for your unique goods, wouldn’t you want to protect that investment.

Companies disclose a good deal of proprietary information and trade secrets to employees during the course of their employment. Naturally, they have a legitimate interest in making sure the employee doesn’t leave and hand over that information to a direct competitor. Courts have held that agreements are only valid when they restrict employees from going to direct competitors. A confidentiality clause cannot legally be so broad that, in essence, it prohibits the employee from working in their trade or skill set should they leave the employer. They can make you sign such a broad agreement or refuse to give you a job, but even if you sign it, it will not likely stand up in court.

Dr_Dredd's avatar

I think it depends on the state as to whether the non-compete clauses are enforceable. When I was still working at Pitt, I had to sign a document saying that I wouldn’t work within a certain number of miles of the university after I left. I don’t know if any lawsuits regarding these contract agreements were ever filed in Pennsylvania, but I do know that some doctors in Arizona and Colorado were successful in having non-compete agreements invalidated.

Also, for medicine, the situation is a little stickier because a patient’s right to see the doctor of his/her choice is also affected by these agreements.

Zaku's avatar

Hmm. I notice though that I don’t think any answers so far really point to any actual penalty for breaking the agreement itself, except for possibly getting fired (which might not be strictly legal without such a condition of employment), or other circumstances that don’t really apply, at least thinking specifically of the case of someone who works at a health club where there is no confidential/valuable information to share with a competitor.

Dr_Dredd's avatar

@Zaku I imagine they’d probably sue for economic damages.

perspicacious's avatar

Non-compete contracts are enforceable in all states. The contract must be specific as to activity, geographic area, and time. All three constraints must be “reasonable.”

Zaku's avatar

@perspicacious Enforceable, but when the contract simply says it’s a condition of employment, and threatens legal action, what is the legal action? It seems to me the contract only includes that the condition of employment. It doesn’t say what other effect of breach of contract there might be. Is there some law someplace that provides for a punishment, or a precedent for assessing damages? What would be the damages from someone working as say a yoga instructor in a different-branded gym?

perspicacious's avatar

@Zaku It’s basic contract law. The liability would be damages sustained by the injured party as well as specific performance and a judicial declaration. General non-compete clauses come into play when the employee separates from the employer. Signing a non-compete may be a condition of employment but it is to protect the employer when the employee resigns or is fired. The contract may actually stipulate a punitive liability, or the method in which damages would be calculated. I will mention that there are times that employers will try to force an employee who is being fired to sign a non-compete under duress by saying no severance will be paid without it. This results in a non-enforceable contract. Just be aware of this.

This is my opinion; not legal advice.

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