To sign or not to sign? Featured

9:59am EDT August 20, 2004
It is not uncommon for employees to be confronted with the decision to sign or not to sign an agreement, to take effect after the termination of employment, which restricts the employee from competing with the former employer.

The higher an employee is on the organizational chart, the more likely he or she will face that decision. These restrictive covenant agreements are often presented with an option to either sign or leave.

There are valid business reasons an employer may ask employees to sign post-termination covenants not to compete. Employees are encouraged to develop relationships with customers and vendors, and have access to confidential information a competitor would value.

It would be unfair to pay an employee to create goodwill with customers, then have that goodwill walk out the door without giving the employer an opportunity to introduce a new employee into the business-customer relationship.

It would be equally unfair to allow an employee to become identified as a supplier of a product or service and, upon termination of employment, set up shop next door in competition with the former employer. The business could also be damaged by a competitor "cherry picking" employees with the assistance of a former employee.

There are valid reasons for an employee to sign such an agreement. What is in the best interest of the employer is also in the best interest of the employee, particularly if all similarly situated employees are required to sign. But these indirect benefits to the employee are tempered by the post-employment restrictions on the employee's ability to earn a living in his or her chosen field of employment or locality.

Post-termination covenants not to compete are generally divided into territorial covenants that prohibit an employee from providing certain services within a defined geographic area for a period of time and covenants not to solicit customers. There are often also covenants not to solicit fellow employees to leave the employer, and such agreements often include covenants not to reveal or use confidential, competitive information.

Georgia courts will enforce a properly drawn covenant not to compete. Georgia's laws on covenants not to unique in that they are derived from our state constitution, which provides that the legislature is without power to authorize contracts that are in restraint of trade.

The application of this provision not to compete seeks to balance the right of the employer to protect itself against competition by former employees with the right of the former employee to earn a living. The courts will generally look to the period of time of the restriction, what activities are prohibited and in what territory the former employee is prohibited from providing services. Although there is no “bright line test” for a reasonable time period for a post employment covenant, two years is generally considered to be reasonable and enforceable. Courts have held longer periods of time to be enforceable; however 5 years in an employment covenant would be pushing the boundaries.

If the covenant is found unreasonably broad, the agreement is considered to be a contract in restraint of trade and will be held to be void.

If an employee is prohibited from providing competitive services within a territory broader or different than the territory in which the employee provided those services for the employer, the covenant will not be enforced. Similarly, absent a territorial restriction, an employer may not seek to prevent a former employee from soliciting customers with whom the employee had no material dealings while employed.

The courts also insist that at the time the employee enters the agreement, the employee must be able to ascertain with certainty the territory in which he is prohibited from performing services, the restricted activity and the time. If a territorial covenant not to compete can move or expand when the employer opens a new office or the employee is reassigned, it will fail because the employee cannot predict with certainty the prohibited territory.

If any provision of a covenant not to compete is found to be unenforceable or overly broad, all covenants not to compete with that employer applicable to the employee will also fail. However, agreements preventing disclosure of confidential information are tested independently of covenants not to compete.

Whether or not an employee should sign such an agreement is dependent upon numerous factors. Not only should the employee consider the benefit such agreements would have on the business, the employee must take into account his or her future plans.

Obviously, the enforceability of the covenant is a factor, but the employee should consider the cost and uncertainty of a court proceeding to establish that legal position.

Robert G. Brazier (Rbrazier@gambrell.com) is a partner with Gambrell & Stolz, L.L.P. He specializes in civil litigation, business law, taxation and bankruptcy matters. Reach him at (404) 221-6506.