business law

A core principle of American society is that, within reason, employers and employees are permitted to contract freely with each other concerning the employment relationship. While the law places some restrictions on the employment contract – e.g., the employer may not pay less than the statutory minimum wage and may not require that the workday or workweek extend beyond the legal limits – freedom of contract is the ordinary rule.

In light of such freedom, may an employer condition employment on the employee’s promise not to compete against the employer, if he or she should subsequently quit the job? As is the case with so many legal questions, the answer is, “it depends.”

Five Basic Requirements for Valid Covenant Not to Compete

In Wisconsin, a covenant not to compete agreement is governed by Wisc. Stat. § 103.465 which, when combined with case law, imposes five basic requirements for validity. A valid agreement generally should:

Be reasonably necessary for the protection of the employer

Since a covenant not to compete restricts the ability of a person to earn a living, courts will enforce them only to the extent that they are reasonably necessary to protect the employer’s valid interests. For example, high-level employees who are privy to trade secrets might reasonably be restricted from competing. Courts are inclined to favor low-level employees, who only perform clerical or administrative duties. Except in exceptional circumstances, courts are slow to enforce restrictions on their ability to earn a livelihood.

Provide a reasonable time period

The shorter the term of the noncompete period, the more likelihood that the restrictive covenant will be enforced by the court. Some experts posit that a clause that restricts an employee for more than two years is unreasonable. There are no specific time limits, however. In some circumstances, even one year might be deemed unreasonable.

Cover a reasonable territory

As with the restrictive time period, the geographic area that is restricted must also be reasonable. Generally speaking, courts will not protect an employer in geographical areas in which it does not currently compete. Moreover, if the agreement does not describe the geographical area within which competition is restricted, a court will not craft one for the employer.

Not be unreasonable to the employee

As noted above, courts are reluctant to ban an employee from supporting his or her family. Some employers fail with this requirement because they simply reach too far. An employer is not entitled to protection against ordinary competition of the type that a stranger would give. If the noncompete agreement seeks to ban activity on the part of the former employee that could easily be performed by a stranger, a court may likely strike down the restrictive covenant as being unreasonable.

Not be unreasonable to the general public

This is yet another requirement that is sometimes ignored by the employer – the interest that the public has in fostering competition. While parties indeed have the right to enter into contracts of their own choosing, those contracts may not restrain trade and commerce. The parties may not unduly hinder competition. Generally speaking, a court is more likely to enforce a noncompete agreement if the agreement prohibits the employee from working for a short list of direct competitors, or prohibits the employee from starting a new business in the precise field that the employer occupies.

Milwaukee Business and Commercial Litigation Attorneys

Is your business currently considering requiring some or all of its employees to sign noncompete agreements? Does your business have trade secrets that need protection? Has your business expended considerable sums in training and equipping employees in such a manner that their becoming associated with competitors would harm it? If so, you should contact the Milwaukee business litigation firm of Kerkman Wagner & Dunn We have over 50 years of combined legal experience representing business owners in Wisconsin. Our firm has big firm talent, and provides small firm attention. Call us at 414-278-7000 or complete our online contact form.

« »