As a business, you may find yourself in a situation where an employee leaves unexpectedly or just doesn’t work out, prompting some concern over what they may do after leaving. Can they go work for your direct competitor? What about for an indirect competitor? It depends – if you took the time to lay out a non-compete agreement for the employee to sign before leaving, you may be entitled to placing some restrictions on the kind of employment they can seek for a certain period of time after leaving.
Section 15.50 of the Texas Business and Commerce Code specifically sets out the requirements for a non-compete agreement in Texas to be enforceable, that they have to be:
- Ancillary to or part of an otherwise enforceable agreement at the time the agreement is made,
- Reasonable with limitations as to time, geographical area, and scope of activity to be restrained, and
- Not imposing of a greater restraint than is necessary to protect the goodwill or other business interest of the employer.
Requirement 1: The non-compete must be ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.
For the non-compete to meet this requirement, the agreement it either supports or is part of must be enforceable and must be supported by consideration, meaning that the employee is ultimately getting something in return, in exchange for agreeing to not compete. Some examples of how an employer can provide an employee with something that would allow the non-compete to be supported by consideration can include:
- Stock options in the company
- Confidential information (Example: Access to the company’s secret recipe and corresponding ingredient list)
- Specialized training (Example: Training on the unique process used by the company to design and create jewelry)
Requirement 2: The non-compete must be reasonable with limitations as to time, geographical area, and scope of activity to be restrained.
For the non-compete to meet this requirement, it cannot impose unreasonable restrictions on the employee in terms of how long the non-compete will last, how far of a distance they must travel to work, and the kind of work they are allowed to do. These elements can vary in how restrictive they are for the employee based on various factors, such as the nature of the information or process the non-compete is attempting to protect.
For example, a salesman who routinely had access to pricing and bid information that changed on a monthly basis may have looser restrictions because the information they had will be stale when new information is brought in. However, a baker whose bakery has always used and will continue to use the same secret recipe may have harsher restrictions because that information will not be replaced with another recipe and will not go stale.
- Time: In Texas, the typical duration of a non-compete accepted as reasonable is up to about two years. Some courts can go up to five years, but it is much more common for a non-compete of two years to be found enforceable than one of five years.
- Geographical Area: Factors such as the location of competitors, how simple it is for the employee to go somewhere else to work, and the scope of the company’s customer base are all taken into consideration. (Example: A company who only sold goods throughout Houston would have a difficult time imposing a non-compete that extends throughout the entire state of Texas)
- Scope of Activities: This relies greatly upon the employer’s ability to specify exactly which activities the employee is prohibited from doing and which customers or clients they are prohibited from reaching. (Example: An employee who only worked on designing clothing for a brand cannot be barred from all activities in the fashion industry)
Requirement 3: The non-compete must not impose a greater restraint than is necessary to protect the goodwill or other business interest of the employer.
In Texas, the idea is to protect the goodwill or other business interest of the employer, but without going beyond the extent necessary to do so. This requirement ties back to the prior three elements of time, geographical area, and scope of activities to make sure that the restrictions imposed on the employee with the non-compete do not go further than they need to in limiting what the employee can do than what is really necessary. For example, there is no reason to impose a non-compete of five years on the salesman whose pricing and bid information will go stale within six months, because it goes beyond what is necessary to protect the goodwill or other business interest of their employer.
Overall, the most important thing to remember when drafting a non-compete is to always seek legal assistance and advice from an attorney to make sure that the agreement meets all the requirements to be enforceable in the state of Texas. If you have a question about any element or component of a non-compete agreement in Texas, the best thing to do is consult an attorney who can guide you through drafting it properly.