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The Delicate Balance And Risks In Non-Compete Clauses

Posted by Jeffrey Forbes on Apr 2, 2020 2:00:00 PM

The delicate balance and risks in non compete clauses rocks balance ocean

Employment contracts are different from most other types of commercial contracts. A host of unique rules apply to employment contracts. At the end of the day, though, they are still contracts and must adhere to the basic rules of contracts, even if those rules are sometimes applied in different ways. This is particularly true when discussing non-compete clauses.

Laws Try Their Best To Balance Growth For Employers And Their Staff

Most states have laws and regulations regarding non-compete clauses. For the most part, these laws attempt to strike a balance between the freedom of workers to pursue their careers after leaving a position and incentivizing employers to invest in their employees by removing fears about the employees using knowledge and training to assist competitors. As such, laws and regulations often limit the time frame and breadth of non-compete clauses to avoid them becoming overly burdensome.

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Such Contracts Should Be Fair For Both Parties

Several states attempt to limit the impact of non-compete clauses through requirements for consideration. Consideration is a legal principle relating to contracts that holds that each party to the contract must receive a benefit in exchange for its commitments in the contract. A contract where one party receives no benefit is invalid and is simply treated as a gift and therefore not legally binding.

Different States Approach The Topic Of Non-Compete Clauses In Different Ways

States have placed specific consideration requirements for non-compete clauses. These requirements often hold that a non-compete clause needs some type of specific consideration separate from the rest of the employment contract to be considered enforceable.

Some states only consider the issue of consideration in a non-compete clause when employers ask current employees to sign a non-compete clause. The thinking behind this is that the job offer to a new employee itself is adequate consideration. Other states disagree and will still require proof of consideration for a non-compete in a new hire situation. In some states, the continued employment of an existing employee may serve as valid consideration for a non-compete clause, but only if the employment continues for a set amount of time after the signing of agreement before the non-compete is enforceable (two years in Illinois for example).

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Cost Of Training For Employees And Non-Compete Clauses

Many states allow the provision of special training or education at the employer’s expense to qualify as consideration for a non-compete clause. However, this type of consideration may be time-limited. In Colorado for example, special training can only serve as consideration for a non-compete clause for up to two years after the completion of the education or training. Stock options or monetary bonuses are an acceptable form of consideration in most states, though not all. It is important to note however that if the option to purchase stock lapses, the non-compete clause will lapse as well.

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Businesses Need To Know What Their State Allows

Ultimately, this is an area where the law differs wildly in many states. Employers must be aware of the specific laws in their jurisdiction regarding non-compete clauses when drafting them and asking employees to sign them. More importantly, however, employers need to pay attention to what promises and benefits they are offering employees in exchange for that non-compete agreement to ensure it’s a bargain they still want to make.

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Topics: HR Insights, Risks For Businesses, Contracts, Independent Workers/ Contractors, Hiring Tips, Laws for Employers, HR