Covenants Not to Compete
In light of the many dynamic public policy considerations in this area of the law, this brief summary of New York law may be helpful for employers trying to navigate covenants not to compete both in hiring and terminating. But because the law surrounding contracts varies from state to state (and sometimes from judge to judge), this summary will address only New York law.
Covenants Not to Compete: What Are They?
“Covenants not to compete” is an umbrella term. It refers to a set of contract clauses, executed between an employer and an employee, which limits the employee’s ability to work with a competitor after their current role ends. These contracts may contain a variety of clauses, such as “non-competition” clauses, “non-solicitation” clauses, “no poach” clauses, or “non-acceptance” clauses. This summary addresses the most common and most litigated clause: a non-competition clause.
A non-competition clause prevents an employee from working at a competing company. The clause may read something like this:
Employee expressly agrees and covenants not to compete directly or indirectly with Employer within a 25-mile radius of any of Employer’s stores either during the term of Employee’s employment or for a period of one year thereafter.
These clauses are aimed at preventing ex-employees from participating in the industry for a period of time following their employment.
When Are Non-Competition Clauses Enforceable?
A non-competition clause is generally enforceable if it (1) is necessary to protect the employer’s legitimate interests, (2) does not impose an undue hardship on the employee, (3) does not harm the public, and (4) is reasonable in time period and geographic scope. See Mission Capital LLC v. Javich, No. 650576/2022, 2022 WL 1035000, at *3 (N.Y. Sup. Ct. Apr. 05, 2022). An employer’s legitimate interest may include: protecting an employer’s trade secrets and confidential information, or preventing employees from taking specialized skills they gained on the job to a competitor.
Under New York law, a restrictive employment agreement will only be enforced if it is reasonable in time and geographic area. While there is no per se unreasonable time period or geographic scope in New York law, covenants of six months to one year in duration and spanning surrounding counties are frequently enforced. See generally, e.g., Natsource LLC v. Paribello, 151 F.Supp.2d 465, 470-71 (S.D.N.Y. 2001).
In determining whether a restrictive covenant is reasonable under New York law, the court must evaluate the need to protect the employer’s legitimate business interests against the employee’s concern regarding the possible loss of livelihood. This analysis lies at the core of the court’s decision-making in this context.
To illustrate how a court might balance an employer’s legitimate business interests against an employee’s ability to maintain a livelihood, it helps to look at two example cases that reached opposite results: Mission Capital LLC v. Javich, No. 650576/2022, 2022 WL 1035000 (N.Y. Sup. Ct. Apr. 05, 2022) and Attentive Home Care Agency, Inc. v. Galinkin, No. 505842/2021, 2022 WL 135321 (N.Y. Sup. Ct. Jan. 13, 2022). In Mission Capital, the court held an employer’s non-compete restriction was not enforceable because it prohibited all competition within a 1,500-mile radius (even though it only applied for one year) and that wide of an area was not a reasonable geographic scope. Mission Capital, 2022 WL 1035000, at *3. In contrast, the court in Attentive Home Care Agency held a non-compete restriction was enforceable—even though it prevented the health aide from working with a current or former customer anywhere in the country—because it found the employee could still make a livelihood as a health aide working for non-customers. Attentive Home Care Agency, 2022 WL 135321, at *3. As these two cases highlight, a court’s enforcement of non-compete clauses depends on a highly complex weighing of the facts.
More information is available from the New York Attorney General’s FAQs on covenants not to compete.
How Should an Employer Handle Covenants Not to Compete in New York?
As a New York employer, covenants not to compete can present challenges, both in the employment hiring and termination context. When hiring a candidate, the employer should be sure to ask whether the candidate is currently subject to any covenants not to compete. Hiring an employee with a controlling covenant not to compete could expose the employer or the candidate themselves to liability. When terminating an employee, the employer should check for applicable covenants not to compete. If such a contract exists, the employer should remind the employee of his or her obligations under the contract and provide a copy of the contract that the employee can show to future employers.
