It is likely that at some point in their careers, laborers will be asked or required to sign an agreement restricting their activities once the working relationship comes to an end. National Public Radio reported in November 2016 that roughly 18 percent of U.S. workers were bound by non-competition agreements alone. This is in spite of the fact that numerous states restrict these agreements, which are prevalent in the construction industry. Many contractors require workers—particularly high-level employees—to sign such agreements as a matter of course. But whether it makes sense to do so—and which type of agreement is the best fit—depends on businesses’ needs and goals, as well as the controlling law.
Generally, non-competition agreements or clauses—also known as “non-competes”—prevent workers from engaging in the same business as their employers’ business after the relationship is terminated. This agreement often occurs at the beginning of the labor relationship with employees making this promise in consideration of new employment. These clauses can prohibit workers not only from starting their own businesses in competition with a former employer but also from working for competitors.
For businesses, the goal of non-competes is to prevent former employees and independent contractors from offering the same services or products as the business. Should the employee or independent contractor choose to violate a non-competition agreement and engage in the same business, typically the employer is then entitled to injunctive relief whereby a court orders the worker to stop engaging in that type of business.
By their nature, non-competes are contracts that restrain trade or commerce. For this reason, many jurisdictions disfavor these agreements. States vary greatly as to whether non-compete clauses are enforceable and, if so, how agreements must be drafted to be enforceable. For example, most who do business in the state of California are aware of that state’s general ban on non-competes (see Section 16600 of the California Business and Professions Code).
Other states, such as Florida, allow non-competes to be enforced in particular circumstances set forth by state statute. In Florida, Title XXXIII, Chapter 541.335, requires that non-competes be signed and in writing to be enforceable. The law also sets forth detailed restrictions that depend on the party against whom they are being enforced. The Florida statute places duration and geographic limitations, among other limits, on these agreements.
In many states, though no statute governs non-competes specifically, court decisions have created com- mon-law restrictions on them. These restrictions tend to be time- and location-based limits similar to the ones codified in Florida. Under Chapter 75 of the North Carolina General Statutes, contracts “in restraint of trade or commerce” are illegal and generally unenforceable. However, in interpreting this ban, North Carolina courts have enforced non-competition clauses in certain, limited circumstances. Under North Carolina case law, to be enforceable, non-competition agreements must be in writing, signed by the employee/in- dependent contractor, and based on valuable consideration. Furthermore, the duration and location in which the worker cannot compete must be “reasonable”. Finally, such agreements must be designed to protect a legitimate business interest, such as investing time and resources toward training employees. (See Young v. Mastrom Inc., a 1990 N.C. Court of Appeals opinion.)
Provided that the terms of these agreements are reasonable, they are generally enforceable regardless of whether the worker quits or is terminated (as long as the termination is not otherwise in breach of an employment contract).
Adequate consideration is an essential element of any enforceable contract and of covenants not to compete in particular. In North Carolina and other states, courts have found that mere continued employment is not sufficient consideration to render a non-compete enforceable. In North Carolina, the promise of a bonus, raise in pay, promotion or a new job assignment is generally sufficient consideration. This means that employers who want current workers to sign a non-compete should be prepared to offer them something in addition to continued employment.