If you want to stay up to date on the laws surrounding non-compete obligations, sign up for a free trial of practical law today. Non-compete obligations hurt workers. Originally intended to protect a company`s trade secrets and other confidential information, non-compete obligations are increasingly being used by companies in low-wage industries to prevent workers from changing jobs, thereby limiting workers` economic opportunities and suppressing their income. Workers in underpaid industries often make more money by changing jobs, so non-compete obligations prevent these workers from improving their wages and working conditions. The non-compete obligation depends on the scope of the agreement and its legal validity if challenged in court. This type of agreement is made between an employee and an employer and stipulates that the employee will not work for competitors for a certain period of time after leaving the original employer. Non-compete obligations are governed by state law and may therefore be enforceable in one state but not in another. In most cases, these agreements are governed by the laws of the state in which the employee works. The use of non-competition dates back to the Reconstruction era, when former slave owners used non-competitors to make freed black workers work and maintain the master-slave relationship. Historically, the common law has regulated non-compete obligations.
 In general, courts will uphold a non-compete obligation if there is an interest worthy of protection and if the clause is appropriate. Various factors are analyzed to determine their relevance.  Although regulated by state laws, common factors include whether the employer has a legitimate interest in protection; if the territorial scope prevents the employee from earning a living; the duration of the restriction; if the agreement prevents workers from performing work other than that which they are doing; and whether the employer provides additional remuneration or benefits in exchange for the employee signing the non-compete obligation.  The use of this criterion requires a case-by-case analysis leading to unpredictable results.  As a result, there has been a call for reform and a movement to ban these clauses altogether. Limits job mobility: Signing non-compete agreements also makes it harder for workers to get better, higher-paying jobs.  Changing jobs is one of the most common ways for workers to receive higher wages.  « Job change, » especially early in one`s career, is correlated with higher lifetime earnings.
 By restricting working conditions, non-compete obligations reduce competition between industries and, consequently, total wages.  With few employers to compete for, workers have fewer opportunities to negotiate higher wages and demand better jobs.  Non-compete obligations cannot be enforced in North Dakota and Oklahoma. California does not recognize non-compete obligations at all, and an employer who ties an employee to an employee after termination of employment can be sued. Hawaii banned noncompete agreements for tech companies in 2015. In 2016, Utah changed its legislation and limited the new non-compete clauses to just one year. What do the courts consider « appropriate »? Although there are differences between States, it is generally accepted that non-compete obligations should not violate public policy. They cannot last excessively long, cover too large a geographical area, or prevent a former employee from working in many types of companies. For example, a non-competition clause that prohibits a physician from practicing medicine indefinitely anywhere in the United States is unlikely to be considered appropriate in most jurisdictions. Similarly, a non-compete clause prohibiting a software engineer from working for a software or hardware company in the state for 20 years is unlikely to be considered appropriate in most jurisdictions. However, especially in cases where a personal relationship with a client is the result of the employee`s skills, reputation and previous relationship, rather than directly performing the work for the employer, it is unlikely that a non-compete obligation would be applied to all of the employee`s customer relationships.7 According to the New York Court of Appeals in BDO Seidman v.
Hirshberg, only if a customer relationship arose from working for the employer: The employer may have a legitimate interest in preventing the « competitive use of a customer relationship » by the employee. Therefore, the attempt to restrict a pre-existing employee/customer relationship is unlikely to be imposed by a restrictive agreement. Non-compete obligations are more likely to be considered appropriate and enforceable to prevent employee recruitment if the employee has sold their accounts receivable or business to the employer.8 To declare a noncompete obligation valid and therefore enforceable, New York courts apply a three-part suitability test. The general rule for determining whether an employee`s non-compete obligation is enforceable is that « (1) it does not exceed what is necessary to protect the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) does not cause harm to the public. » 2 As a result, reasonableness varies, and the court considers all the details of the case before making a finding of law. To be effective, the non-compete obligation should reflect this standard of adequacy.