Non-Compete Clauses in Employment Contracts

A non-compete clause or non-compete agreement (NCA) is a contract that restricts employees from working with businesses or entities that are competitors of their employers. Non-compete agreements are typically used in the following industries:

• Financial, real estate, and insurance
• Manufacturers
• Construction
• Retail trade
• Information

While these industries typically include non-compete agreements in their contracts, other companies (i.e., salons, yoga studios, small businesses) may ask employees to sign this agreement. Violating these agreements can lead to serious consequences and litigation.

What to Know About Non-Compete Agreement as an Employer

Non-compete agreements generally protect company interests. When reviewing non-compete agreement disputes, courts often protect the rights of employees, ensuring the terms of the agreement are reasonable. When considering or drafting non-compete agreements, be sure to consider the following:

• The time restraints are reasonable for employees, and the length of time is suitable enough to protect your interests.
• The geographic limits are also reasonable and are not unduly restricting employees.
• Consider customizing your non-compete agreements for your company and specific employees. For instance, someone with an executive position may have a more stringent agreement than an entry-level administrator.
• Show consideration to existing employees. When you include non-compete agreements within new employee contracts, the exchange for signing the agreement is a new job. For existing employees, you may consider offering bonuses or raises in exchange for signing a non-compete agreement.

Tennessee also has specific laws regarding non-compete agreements for healthcare providers. If your business falls under the “professions of the healing arts,” you will want to consider these additional laws (Tennessee Code § 63-1-148).

President Biden’s Executive Order Proposes Restrictions on Non-Compete Agreements

Earlier this year, President Biden signed an executive order, which aims to push for a competitive U.S. economy. In this order, non-compete agreements are targeted, and the Federal Trade Commission (FTC) is challenged to take steps to limit non-compete agreements that unfairly restrict employees’ ability to change jobs.

Specifically, the executive order asks the FTC to consider working “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

California, Oklahoma, and North Dakota already generally prohibit non-compete agreements; other states, after President Obama’s call to action, also curtailed non-compete agreements. Will this order mean other states (like Tennessee) will ban or limit non-compete agreements more than they currently do?

It is important to remember that it will be a while before new laws or regulations become a possible reality as the order simply asks the FTC to start considering restrictions.

If your company wants to ask employees to sign a non-compete agreement, you should consult an experienced business litigator. Not only will they be up to date on relevant legislation, but an experienced attorney will also know how to ensure the contract is best upheld in court.

Understanding Non-Compete Agreements as an Employee

You may be asked to sign a lot of contracts and paperwork, and you should understand what you are signing and agreeing to uphold. You can be asked to sign a variety of agreements that protect the company and/or your personal interests, which may include:

• Traditional non-compete agreements, which specify a geographic region and time period that an employee cannot work for a competitor
• Non-solicitation agreements, which prohibit employees from poaching clients or other employees when they leave the company
• Non-disclosure agreements, which disallow employees from sharing proprietary information, marketing plans, client lists, and other information

Oftentimes, non-compete agreements will be a part of your new hire paperwork. However, in some instances, you may be asked to sign a non-compete agreement later in your employment. You may even be asked to sign one to obtain severance.

Businesses generally want employees to sign this agreement so that they can protect business secrets. In signing and agreeing to a non-compete agreement, you may be banned from taking certain documents or data with you when you leave or from sharing certain trade secrets.

According to Tennessee Code § 47-25-1702 (2019), trade secrets is defined as information, such as financial data, formulas, programs, devices, techniques, or processes that:

• Is subject to reasonable efforts to maintain its secrecy
• Obtains economic value by not being widely known or accessible to others who can profit from its disclosure or use

A non-compete agreement should not indefinitely stop you from working at a competing company nor should it violate your right to seek new employment or obtain an income.

Are Non-Compete Agreements Enforceable If You Are Laid Off?

Non-compete agreements can affect you for years, even after you’ve left a company. If you’ve signed a non-compete agreement, you must abide by its terms even if you are laid off. You can try to void the contract, and if your ability to make a living is being impacted, courts may rule in your favor. But you do not want to open yourself up to litigation as the penalties may be severe.

What Happens If You Violate a Non-Compete Agreement?

If you are found in breach of a non-compete agreement, your employer may sue you. They can seek to be financially compensated for losses and damages or to uphold the agreement and require you to not work for a competitor.

In considering the enforceability of non-compete agreements, courts will consider:

• How reasonable the time and geographic constraints are
• The harm the employer may face
• The impact on the employee

Non-Compete Agreements Are Contracts

Non-compete agreements are legally binding and enforceable in Tennessee. Every case is different for both employees and employers. For help navigating business litigation cases surrounding non-compete agreements, you should seek legal counsel immediately.