As our society and workforce has become more mobile, the presence of non-competition covenants has increased. What does that mean in today’s workforce for employees and employers? In Virginia, covenants not to compete are disfavored and will only be enforced if specific requirements are met. To be enforceable in Virginia, a non-competition covenant must (i) be narrowly drawn to protect a legitimate business interest, (ii) not be unduly burdensome on the employee’s ability to earn a living and (iii) not be against Virginia’s public policy. Because they are disfavored in Virginia, an employer will bear the burden of proof to sustain a non-competition covenant and any ambiguities in the agreement will be construed against the employer. Assessing whether or not an employer has met this admittedly heavy burden in any given case will generally depend on the extent of the functional, geographic and temporal elements of the restriction. Courts will look at all of these elements collectively to reach an ultimate determination.
A question for employers and their employees is, given the heavy legal burden on employers who seek to enforce restrictive covenants, does that mean that practically speaking covenants not to compete cannot be enforced in Virginia? In short, the answer is no. With proper drafting, restrictive covenants are enforceable. However, employers need to pay close attention to why they feel the need to impose a covenant not to compete and then carefully assess the scope of any restrictions. For example, non-competition covenants have been struck down because they restricted a former employee from working for any competitor in the same basic industry as the former employer when in fact the former employer was engaged in a specialized segment of that industry. Conversely, a covenant restricting sales of the type of medical equipment specifically sold by the employer was upheld because sales of other types of medical equipment were not prohibited. Courts increasingly look at the specific work an employee performed for an employer and view with disfavor restrictions that apply to roles that are unconnected to the former employee’s duties with the company. This is often referred to as the “Janitor Test”. If a restrictive covenant would prohibit a former employee from working as a janitor elsewhere, even if the company is a direct competitor of the employer, then a court is likely to find the restriction to be overbroad.
Similar considerations apply to the time and geographic scope components. If an employer has never operated in a neighboring state, it will have a hard time justifying a covenant that restricts an employee from operating in that state. The focus of any restriction should be on where the employer actually conducts business and often where within that area the employee worked for the employer. The length of the restriction must also be carefully considered. Unfortunately there are no clear rules about what length of time is enforceable. Courts are not interested in protecting employers from legitimate competition. If a restrictive covenant is designed to last just long enough to give an employer a reasonable amount of time to replace a salesperson and introduce them to its customers, it will be more likely to survive court scrutiny than if the covenant extends for a period determined to be longer than necessary or is viewed as being punitive in nature. As a general rule, the shorter a restriction lasts, the better chance it has of surviving a legal review. In appropriate circumstances, covenants of three years have been upheld, although a more common duration for an employee is one year or maybe two.
Employers should carefully assess the business interests they are seeking to protect when determining whether or not to use a covenant not to compete. Utilizing a covenant not to compete for every single employee in a company is probably overkill and may actually be counterproductive. What is the business interest in prohibiting an entry level accounting staff person from moving to a competitor? What about an in house IT support person? Often, an employer’s interest can be met by other means, such as reference to the Virginia Trade Secrets Act or by means of a confidentiality agreement.
How should employees evaluate a noncompetition agreement? First and foremost they should read it and make sure that they understand it and how it might affect them if/when they leave their prospective employer. What specific activities are prohibited? How long does the covenant last and in what geographic areas does it apply? It is an unfortunate reality that many employees only read their employment agreement and/or restrictive covenant agreement when they are thinking of leaving or after they have left a company. At that point, it is often too late to do anything. However, consulting a lawyer familiar with Virginia’s approach to restrictive covenants will help an employee better assess the enforceability of a particular restriction and potentially craft a strategy to address the restriction. Of course, the best approach is to review any restrictive covenant, and if necessary, seek legal advice before signing it. This can help an employee better understand what taking a position with the employer will mean in terms of future employment flexibility.
Employees should never be afraid to ask questions if they do not understand something in their agreement. A good employer will be happy to answer questions asked in good faith and employees have an absolute right to have an attorney review any agreement before they sign it. Can an employee reasonably expect to be able to negotiate the terms of a restrictive covenant? Probably not, although some companies will consider reasonable requests. Negotiating a restrictive covenant can be a risky endeavor. In Virginia, there is nothing prohibiting an employer from withdrawing the offer of employment. Even if the offer is not withdrawn, an Employer may question a prospective employee’s enthusiasm or commitment and that may lead to a rocky start to the relationship. Sometimes a better approach is to speak with existing employees to help assess an employer.
For more information, please contact Pender & Coward's corporate and transactional or labor and employment teams.