Business owners in many industries utilize non-compete agreements concerning professional employees and jobs that may involve access to sensitive business data. Non-compete agreements prevent former employees or independent contractors from engaging in the same type of work after their termination, usually for a certain length of time or within a certain geographical area.
Non-compete agreements are generally legal under Arizona law when they protect the employer from unfair business competition by a former employee. However, these agreements do have some limitations. Non-compete agreements must meet specific criteria to be legally valid. As a result, their enforcement can lead to legal disputes. As a result, having an Arizona business lawyer to advise you on non-compete agreements is wise.
Enforceability of Non-Compete Agreements
The restrictions in non-compete agreements adversely affect the ability of workers to work in their fields and support themselves. As a result, courts will uphold non-compete agreements only if they apply to the employer’s legitimate and protectable business purposes and interests. Legitimate business interests may include important information such as trade secrets, customized business practices and procedures, and client lists. Protectable business interests are not readily available to the public but only to the employees with access to such information.
As a result, a non-compete agreement may not be enforceable if it is unreasonable or overbroad in its attempt to prevent the former employee from competing with the employer. While a company has the right to protect its business, it cannot take steps to eliminate all potential competition through a non-compete agreement. Likewise, the court will not permit a company to unreasonably prevent a person from earning a living.
Most non-compete agreements define a specific period during which the former employee may not engage in the same type of work that they performed for the employer. The length of this period may depend on the type of job involved. For instance, a two-year restriction period might be appropriate for some higher-level executives. In contrast, six months might be more appropriate for low-level workers without access to sensitive company information or procedures. An unduly restrictive time limitation in a non-compete can be a reason for a court to find the agreement to be legally invalid.
Furthermore, the reasonableness of a time restriction also may depend on how quickly the company can replace and train a new employee. For example, suppose the company easily can and does replace and fully train a new employee within two months. In that case, a non-compete with a two-year restriction on a former employee’s ability to work in the same field may be overbroad and unreasonable.
Historically, non-compete agreements contained a geographic restriction on the ability of a former worker to perform the same type of work relative to the former employer’s location. This restriction aims to prevent an employee from leaving one employer and going to work for another nearby employer that competes with the former employer. However, with the rising incidence of global and virtual workplaces, geographic restrictions have become irrelevant in many respects and, thus, no longer may be an automatic provision in a non-compete agreement.
As with time-related restrictions, courts will enforce geographic restrictions only to the extent necessary to protect the company. For instance, geographic restrictions may be important for small local businesses that provide services to nearby customers or clients. However, those same geographic restrictions may not make sense if a business’s client base is outside the local area.
Some companies use non-compete agreements to prevent former employees from soliciting their customers, clients, or other employees. But, again, these provisions must be reasonable in scope and duration. For example, the court is unlikely to uphold a “hands-off” provision that covers present customers and extends to former or potential customers.
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