As your business expands, you’ll inevitably need to utilize other people to perform the work. Whether they’re freelancers, employees, or your business partners, each of those individuals increase the risk profile to your day-to-day operations. Each may be privy to the sort of confidential information that makes your business profitable. Or they may develop close relationships with essential clientele, vendors, suppliers and/or employees. Regardless of whether you’re operating a small business or a sizeable corporation, you need to know how to protect your hard-earned assets.
This is where restrictive covenants come into play. Non-solicitation and non-compete agreements are legal tools that many employers use to protect themselves from both current and former employees and contractors cutting into their profit margins. These clauses are commonly incorporated into employee handbooks, signed stand-alone employment agreements, and independent contractor agreements. When drafted properly correctly, these terms remain in effect even after the work relationship is terminated.
What distinguishes non-solicitation and non-compete agreements? And how do you go about writing one that will be legally enforceable in New York? These two closely-related clauses are easy to get mixed up or word incorrectly—which is why we’ve broken down what differentiates them and how to structure each to ensure it provides adequate protection for your business interests.
A non-solicitation clause protects your employees, vendors, suppliers and/or clients from being solicited (i.e., asked or invited) by someone to discontinue or modify their business arrangement with you. Practically, it means luring away key employees to a competitor, or persuading a vendor/supplier to only supply certain key goods to a competing business, or to invite customers to purchase elsewhere. Typically, this solicitation is able to take place because of confidential information that a person has obtained while working with or for your business. Because of this misuse of confidential information, New York courts are likely to enforce a reasonable non-solicitation clause.
What does a reasonable non-solicitation agreement contain? It prohibits a person from actively attempting to talk customers, suppliers/vendors or other employees from leaving or changing their relationship with you. It typically has a timeframe of six months or more. It may be limited to a particular industry or geographic region.
It doesn’t forbid another employee from leaving your company and going to wherever the other person went. It doesn’t require customers to stay with you. And it doesn’t force vendors to sell you products at a certain price. It just means that someone cannot take the knowledge of your business and use it to harm you – while working with you or after.
A non-compete clause is a contractual obligation wherein a partner, employee or contractor agrees to not enter into, assist with, or start a similar business or market the same service in competition with the employer. It keeps the person from using the key confidential information he or she learned while working with your company from utilizing that “insider” knowledge against you. Non-competes can be used in the trades (e.g., for electricians, plumbers, hair stylists), professions (e.g., accountants, architects) and specialty retail (e.g., a high-end ice cream store, bespoke jewelry). A company uses it when it is concerned that proprietary knowledge can be actioned against it. A non-compete, to be valid, must have a clear ending date, and be limited in reasonable geographic scope to protect the company’s interests. It must always be accompanied with consideration (e.g., compensation). You need to be careful in drafting the non-compete in order to not run afoul of state requirements.
Drafting Enforceable Restrictive Covenants
The applicable state statutes regarding the judicial enforceability of restrictive covenants vary considerably. In New York, the law generally recognizes non-competition agreements as enforceable as long as they are deemed “reasonable.”
But what factors exactly constitutes the reasonableness of a given agreement?
New York Courts utilize a balancing test in which they weigh the employee’s right to pursue employment using the training and experience garnered during the scope of their former employment relationship against the former employer’s legitimate business interest in safeguarding its profitability from individuals who may attempt to use the proprietary information for their own advantage.
The Court will take into account the length of time the non-compete bars employees from working in a competitive manner as well as the scope of the geographic limitation imposed. If either of these restrictions are too excessive, it is likely that New York Courts will find them enforceable. Typically, we see non-competes of more than one year highly scrutinized; similarly, we see non-competes that force someone to not work in the NY metropolitan area to be highly suspect. New York Courts analyzing whether or not the non-compete furthers a legitimate business interest of the employer. Courts also take into account the impact restrictive covenants will have on the collective public interest. For example, courts have ruled that a non-compete agreement was unenforceable on public interest grounds when a physician was barred from practicing for a considerable amount of time within a certain area. Courts have also not enforced non-competes when the employee was dismissed without cause.
The proper drafting of restrictive covenants is something that is highly specialized and contingent on a number of factors. Business owners shouldn’t put their livelihoods at risk. When in doubt, consult with a qualified business attorney to get assistance.