In a job market with high turnover rates, noncompete contracts are useful ways to protect your business in industries that are susceptible to damage when an employee brings knowledge of internal operations to other companies. This article is meant to help you decide whether your business would benefit from a noncompete contract for your employees or business partners.
Why Draft a Noncompete Contract?
In a job market with high turnover, noncompete contracts can help businesses that operate in competitive industries with unique processes and products protect themselves from employees who don’t plan to stay with your company long-term.
These contracts can limit the type of work the employee does, the areas in which they can work, and the information they can share. While noncompete contracts have several restrictions, and can’t be excessive, they may give you the peace of mind if a former employee goes to work for your direct competitors.
Most Noncompete Agreements Take Similar Approaches
The first step of a noncompete agreement is drafting a contract. Generally, whether you have a contract is similar in every state—all contracts between parties must have an offer, acceptance, and consideration. In this scenario, an offer is a noncompete contract, acceptance is the employee’s acceptance, and consideration is generally, employment. While this can become complicated with other contract law issues, those three considerations are the building blocks of every contract.
Once you have a contract, the next consideration is whether the noncompete portion is enforceable. In a nutshell, noncompete contracts revolve around “reasonableness.” While reasonableness can seem like an amorphous requirement (and often is), most states combine general principles like the interest being protected by the employer, the length and radius of the restrictions, and generally how reasonable or oppressive it is to the employee.
There Are Some Substantial Differences Between States
Wisconsin has enacted a statute laying out five elements a noncompete agreement must meet. According to the statute, noncompete agreements must:
- Have reasonable, protectable interests;
- Have reasonable time limitations;
- Have reasonable geographic limitations;
- Be reasonable to employees; and
- Be reasonable to the general public.
In Illinois, noncompete agreements are a bit more complicated. While the state adheres to many of the same general principles, it applies several additional restrictions to noncompete contracts. As of January 1, 2022, Illinois enacted a law strictly regulating noncompete contracts. Among some of the restrictions, employers can’t:
- Contract not to compete unless the employee makes more than $75,000 annually (increasing by $5,000 each year until 2037);
- Contract not to solicit with employees who make $45,000 annually or less (increased by $2,500 each year until 2037);
- Contract not to compete with employees who were terminated, laid off, or furloughed related to COVID-19; and
- Make a covenant not to compete with employees who are involved with collective bargaining agreements.
Please note that these are not all of the new considerations that apply to noncompete contracts in Illinois, and you should contact an attorney who practices in Illinois if you have any questions about the state’s restrictions.
In Ohio, a noncompete agreement must not be for a period that is longer than required for the protection of an employer’s legitimate interest, must not impose an undue hardship, and must not be unfavorable to the public.
In Michigan, courts look at whether a noncompete agreement is reasonable and engage in a fact-intensive analysis. In evaluating a noncompete agreement’s reasonableness, Michigan looks at:
- The type of business, industry, or position involved;
- The duration of the noncompete term the worker must follow;
- The geographic location of the agreement; and
- The business interest protected by the agreement.
While each state may have small variations, most operate within a similar framework.
Bottom Line
While noncompete contracts seem like an easy way to prevent employees from leaving your organization and spreading confidential information to your competitors, those contracts must be properly drafted to ensure that they are legal and enforceable.
Noah T. Rusch is an attorney with Axley Brynelson, LLP, in Madison, Wisconsin. You can reach him at nrusch@axley.com.