North Carolina courts apply a reasonableness test when looking at non-compete agreements. The agreement must be reasonable as to the time period during which the employee is prohibited from competing, the territory in which the employee is prohibited from competing, and the restrictions must serve a legitimate business purpose. In addition, the employer must give something of value to the employee in exchange for the restriction and the agreement must be in writing.
The last of these issues is the simplest. The non-compete agreement must be in writing, and it must be signed by the employee, or made part of the employment contract in some other manner. The issue of consideration (value) is a little more complex. The employee must receive something in exchange for giving up his right to compete. Consideration is not an issue when hiring a new employee as North Carolina courts have held that the promise of new employment is sufficient to make a non-compete agreement enforceable. However, additional consideration must be offered to an existing employee. North Carolina courts have ruled that all of the following are valid consideration that will allow the enforcement of a non-compete agreement: continued employment for a set length of time, an increase in salary, a promotion, additional training, shares of stock, or some other increase in responsibility or hours worked.
Once the threshold issues of writing and consideration are met, the enforceability of the non-compete turns to the reasonableness factors: time, geographic scope, and business purpose. Courts frequently look at the reasonableness of the business purpose from both a customer-centric and business-centric point of view. If the departing employee is in a position to interact personally with customers of his old employer or to obtain valuable commercial information about them, a non-compete agreement is likely to be found to have a legitimate business purpose. Agreements that prevent an employee from working for a direct competitor are also usually found to be reasonable.
North Carolina courts look at six factors to determine whether the geographic restriction is reasonable: the total scope of the restriction; the area in which the employee was assigned; the area in which the employee actually worked; the employer’s area of operation; the nature of the business; and the nature of the employee’s duties and his knowledge of the employer’s business operations. Unfortunately, due to the number of factors and their interrelation, it is hard to come up with a rule of thumb for what type of geographic restriction will be enforced, other than the smaller the restricted area is, the more likely it is it will be found reasonable. Employers should consult with an experienced attorney when drafting a non-compete agreement in order to ensure that the agreement will be enforceable.
The same idea also applies to the time restriction: the shorter the time, the more likely it is the restriction will be found reasonable. Generally, according to established North Carolina case law, anything longer than five years will not be enforceable, and a year or less will almost always be enforceable. However, even this rule of thumb is complicated by the fact that courts look at the time and geographic scope restrictions in tandem. The more restrictive one is, the less restrictive the other must be in order for the agreement as a whole to be enforceable.
Since enforceability is dependent on the individual facts of each situation, drafting a non-compete agreement is one of the most difficult things a small business owner can attempt to do, and it is something we absolutely recommend you do not attempt to do alone. The attorneys at Miller & Monroe have drafted many non-compete agreements and we would be happy to do the same for your business.