What Businesses Should Keep In Mind About Non-Compete Agreements

Ruth Binger was asked a few employment law questions by Ron Ameln, editor of St. Louis Small Business Monthly. Here is the first question with her response. Click here to see Questions 2 & 3 about things to keep in mind when terminating an employee.

With the tight labor market, business owners are doing everything they can to keep employees. Some are looking at non-compete agreements. Others hope their current agreements will help keep employees in the current environment. What should businesses keep in mind with these agreements?

Non-compete agreements are negative guardrail enforcement to protect your business. To enforce a non-compete, you must be able to prove that the business has a protectible interest in its trade secrets and customer relations and the covenants are reasonable. The key is to have your employees sign non-compete agreements on the first day of employment. If you require that the employees sign the agreement post-hiring, you will have issues with morale (employee may leave) and enforceability. To ensure enforceability of post-hiring agreements, you should consider providing additional consideration, such as bonus, raises, promotions, or benefits.  Inception of employment is consideration for the on-hire non-compete.

The term “non-compete” is used to describe three types of restrictive covenants, and people use the term interchangeably.

1. Time and space. This is very commonly used for managers and executives. The most protection an employer can obtain is for two years and within a reasonable geographical territory. In short, it is limited to where you are geographically doing business.
2. Non-solicitation of customers. This is very common for salesperson and is generally for two years. The Supreme Court directs that employers can only prohibit an employee from soliciting customers with whom the employee deals with personally. It can’t be every customer the employer services. The law protects customer relationships.
3. Non-solicitation of employees. These are generally used for all agreements and are critical for maintaining your workforce. Missouri statute only allows one year unless you can show certain facts.

Keep in mind that the type of non-compete agreement you use will differ based on the position. A company president will have a different agreement than a salesman. For most production employees, all you may need and be able to enforce is a confidentiality agreement. In some states, unlike Missouri, enforceability depends on yearly compensation. For example, under the Illinois Freedom to Work Act, in addition to other requirements, for a non-compete to be enforced, an employee must make more than $75,000 a year for a time and space non-compete and more than $45,000 a year for a non-solicitation clause.

Posted by Attorney Ruth Binger. Binger serves both emerging and mature businesses concentrating in corporate law, intellectual property and technology law, cybersecurity, digital media law, and labor and employment law. Her commitment to the success of small to medium-sized businesses, and her understanding of multi-faceted issues inherent in operations, are what distinguish Binger’s practice.

Published in December 2022 issue of St. Louis Small Business Monthly

© iStock.com/William_Potter