Written by Team Farallon
It is a clause that appears in the employment contract drawn between the employer and employee.
The clause prevents employees from seeking employment in another organisation or engaging in any kind of business in certain markets and geographical locations during a period of time. Its main purpose is to exercise control over an employee’s actions, both during the employment period or/and after the employment contract is terminated.
The non-compete clause is generally invoked by the employer to safeguard the “Legitimate Proprietary interest” at the termination of employment provided the clause is within the “reasonable scope”.
Any asset or advantage that is regarded as the property of the employer solely belongs to the employer. This type of ownership, termed as “Legitimate Proprietary interest”, is meant to protect the employer from an employee’s unfair practices. Client and trade connections fall within the ambit of legitimate Proprietary interest. However, the advantage does not extend to any skill or know-how acquired by the terminated employee during the time of employment with the employer.
The Non-Compete clause should be reasonable both between the employer and the employee and for the interests of the general public. For instance, in order to be reasonable in the public interest, the geographic restriction on the employee in certain markets cannot adversely affect competition in those markets. However, the burden of proof to show that the scope is reasonable when seen from the perspective of public interest lies on the employee.
A non-compete clause is said to be unreasonable and hence, cannot be legally enforced if it is intended to have the following impact:
In some employment contracts, employers may include clauses that stipulate the following:
In all the above cases, the non-compete clause cannot still be enforced because the enforceability depends on “reasonable scope” and NOT inclusion of such stipulations or agreements between the contracting parties. This is so to protect both public policy and the employees if they try to leave their employer later on, as they will not know the extent of the restraint against them.
In case the Non-Compete cannot be enforced, the court will generally do one of the two things based on the existing circumstances:
It is important to note that the “blue pencil test” cannot be used to fix an unreasonable non-compete clause if there is nothing that can be cancelled out to make the clause reasonable.
The blue pencil doctrine gives courts the authority to either strike unreasonable clauses from a non-compete agreement, leaving the rest to be enforced, or actually modify the agreement to reflect the terms that the parties originally could have — and probably should have — agreed to.
Employers can seek the following remedies if an employee chooses to break or violate a non-compete clause.
Employees also have the option to legally counter the unreasonable non-enforceable Non-Compete Clause or any non-payment of compensation due to him or her as per the contractual obligations of the employer.
It is strongly recommended that an employer or employee consult an employment lawyer to seek assistance to determine if a non-compete clause in the employment contract is legally enforceable.
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