Noncompete agreements have come under scrutiny in recent years as more companies are asking employees to sign them even in cases where they may not be warranted.
It’s estimated that nearly one-fifth of U.S. workers are covered by noncompete agreements, which generally limit a person’s ability to work for a competitor or start a competing business within a specific geographic area for a specified period of time.
While such agreements aren’t prohibited in New York, they are, for the most part, disfavored at both the state and judicial level, making it critical for employers to review their noncompete policies going forward.
“Every case that comes before the courts when it involves these type of agreements is highly scrutinized in New York,” says Avrohom Gefen, a partner at Vishnick McGovern Milizio LLP in Lake Success.
The courts’ general issue is that the agreements prevent someone from pursuing his or her livelihood, he says.
“The . . . effect on the employee is quite drastic and courts don’t like it,” agrees Alan Hyde, a professor at Rutgers University in Newark, New Jersey, who writes and consults on noncompetes. “Employers use them to discourage competition even though that’s not a legitimate use.”
Recently, in Buchanan Capital Markets LLC v. DeLucca, a New York appellate court declined to uphold a noncompete agreement under the premise that when an employee is terminated without cause, a noncompete cannot be enforced, Gefen says.
Nicholas M. Reiter, counsel in the labor and employment group at the Manhattan office of Venable LLP, says that while courts have offered conflicting statements on the enforceability of noncompetes over the years, the Buchanan decision moves “closer to a bright line rule where if an employer fires an employee without cause,” a noncompete will not hold up.
That means employers should re-evaluate whether their contractual definitions of termination “for cause” are worded appropriately to maximize the likelihood that their noncompetition agreements can be enforced, Reiter says.
Noncompetes have also been criticized by state Attorney General Eric T. Schneiderman, who plans to introduce legislation in Albany that would include a ban on noncompetes for low-wage workers.
“The most legitimate agreements are where you have high-level executive-type people” who possess both knowledge and expertise that could prove detrimental to their former employer if used to compete against them, Gefen says.
He advises employers to carefully consider which workers they ask to sign noncompetes, to make sure they’re necessary.
The only reliable grounds on which an employer can enforce a noncompete is the protection of trade secrets or other confidential information such as a customer list, Hyde says.
He suggests employers consider narrower agreements that may have a better chance of being enforced, such as one that lays out what information is considered a trade secret that the employee promises not to disclose.
Jason Aptekar, CEO of The Mithril Cloud in Westbury, a technology consulting firm and managed cloud service provider, says he’s constantly evaluating his agreements based on what’s happening in the marketplace.
His intent with noncompetes for certain “skilled knowledge workers” isn’t to stop them from getting employment or doing business, but rather to protect his business interests, he says.
He invests in his employees and if they are, for example, introduced to a new relationship with a third party as a result of working for Mithril, Aptekar shouldn’t be on the losing end if that employee leaves.
“I want to have recourse if I invest in a relationship,” he says.
Percentage of workers earning less than $40,000 that are subject to noncompete agreements
Source: 2016 White House report