Critical Non-Compete Legal Updates For Your Business

Does your business use non-competes with its employees or independent contractors? Make sure it's drafted right, or you could face fines and penalties.

Many businesses could find themselves facing fines and penalties if they use old versions of non-compete agreements with their employees and independent contractors, or if they don’t work with an attorney experienced in state non-compete law to carefully draft their documents for them.

Several states, including Washington, Oregon, and California, have put into effect new laws that prohibit, or at least severely limit, a business’s ability to require that employees and independent contractors enter into non-compete agreements. Businesses that don’t follow non-compete laws can face fines and penalties. In several states, these fines and penalties apply even if the business doesn’t try to enforce the non-compete; just having the employee or independent contractor sign it is enough to expose the business to liability that can include fines of up to $5,000 per contract.

What Is A Non-Compete?

A non-compete is any agreement that states one person or business cannot compete with another business. It’s typically used in employee and independent contractor agreements to prevent a person or business from learning about a business from the employer, and then taking that knowledge and information and using it to compete with the employer.

What’s In A Non-Compete?

A non-compete typically includes terms stating that the employee or independent contractor can’t compete with the hiring company for a certain period of time after the employment/contracting engagement ends. There is usually a geographic component as well, so that the non-compete is only effective in a certain geographic area.

Why Punish Businesses For Using Non-Competes?

Recently, state legislatures have become concerned that non-competes can effectively prevent a person from having a job. For example, let’s say I own an insurance agency, and I fire one of my insurance agents, Sandra, for under-performing. It’s possible Sandra’s non-compete would prevent her from being an insurance agent again for, say, another year. Because that’s the profession Sandra knows and is qualified for, she might not be able to get other employment in her chosen career as an insurance agent. Or, she might have to move hundreds of miles away to get a job.

State legislatures also worry that non-competes might prevent someone from leaving their job. Let’s say Samirah is a high-performing insurance agent in my brokerage, and my commission structure is not favorable to high performers – she could double or triple her pay by moving to the brokerage across town. But, my company’s non-compete effectively keeps her captive because, to make that move across town, she’d have to be unemployed for a year or more until her non-compete expires.

How Do The State Laws Regulate Non-Competes?

State laws in Washington, Oregon, California, and elsewhere regulate non-competes by either: (1) prohibiting non-competes entirely; or (2) strictly limiting the terms and conditions of employers’ non-competition agreements. When a business requires an employee or independent contractor to sign a non-compete that doesn’t comply with the state’s statute, there are negative consequences for that business. At best, the non-compete is completely ineffective. At worst, an improper non-compete can expose your business to fines and penalties, even if you never try to enforce it.

Does Idaho Regulate Non-Competes?

Idaho does have laws regulating non-competes, but as of the date of this article, Idaho does not regulate non-competes as strictly as Washington, Oregon, and California. But, because of the state’s geography and the location of Idaho’s more populated areas, many businesses in Idaho hire employees across state lines. If they’re not careful, Idaho businesses can find themselves on the wrong side of their neighboring states’ non-compete laws.

How Do I Make Sure My Business’s Non-Compete Is Legal?

Because laws vary so wildly from state to state, and because non-compete laws are currently in a state of flux across the nation, we strongly recommend working with an experienced business attorney to draft your company’s non-compete agreements. We also very strongly recommend that businesses have their attorneys review their non-competes yearly to ensure the business keeps up with this rapidly changing area of law, avoiding potential liability, fines, and penalties. Skepsis Legal works with businesses to advise on and draft non-competes that are legal, enforceable, and that protect the company from liability for potential violations of state laws. If your company is considering a non-compete for use with its employees or independent contractors, we recommend booking a consultation with one of our attorneys today.

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