Covenants Not to Compete Are Tough to Enforce

Covenants not to compete instill terror in employees. As written, covenants not to compete can force an employee to stop working in his or her profession for months or years.

Covenants not to compete instill terror in employees. As written, covenants not to competecan force an employee to stop working in his or her profession for months or years. Basic principles of law, and common sense, teach that contracts between parties should be enforced. Most contracts are enforced as written. However, courts look at some contractual provisions with skepticism, including covenants not to compete.

A covenant is a promise. A covenant not to compete is a promise in an employment agreementthat states that, if that employee ever stops working for the employer, he/she will not compete against the employer.

If there is doubt, a court will not enforce a covenant not to compete

Covenants not to compete are “strictly construed” against the employer. This means that if there is any doubt as to whether a court will enforce it, a court will not enforce it. 

Is the covenant not to compete reasonable?

A court will not enforce a covenant not to compete if it is not reasonable. This means that a court will not enforce a covenant not to compete if 1.) the restraint is greater than necessary to protect the employer’s legitimate interest or 2.) if the hardship to the employee outweighs the employer’s legitimate interest. An employer has a legitimate interest in keeping its customer base and customer sources. It also has a valid interest in protecting its trade secrets. On the other hand, an employer has no legitimate interest in simply keeping the employee from working simply because the employer can.

When deciding whether a restraint is greater than necessary to protect its interest. Courts look to the length of time and the geographic scope of the restraint. As for the length of time of the covenant, the time should be no longer than necessary to hire a new employee and for that new hire to demonstrate his/her effectiveness to customers. Thus, covenants that are three years long are often found to be too long. In the roofing context, if it would take three months to replace and train a salesman/estimator, a three month restriction may be reasonable.

Geography and covenants not to compete

As for the geographic scope, the geographic areas need to be limited. A geographic radius of 5 miles from the employer’s office may be reasonable, but 50 miles may not be reasonable. Whether the radius in the covenant is reasonable depends upon the type of business.

Even if the restraint is reasonable, courts will balance the harm that enforcing the covenant would place on the employee with the employer’s interest in keeping its customers and trade secrets. Courts are very reluctant to keep ex-employees from making a living and will err on the side of protecting the employee.

Provisions that may cause harm to the public

Courts are also not as likely to enforce a provisionthat causes harm to the public, for example, one that keeps a surgeon from performing surgeries. Courts have found that this particular skill is needed by the public and it should not be unduly constrained.

Finally, covenants not to compete are more likely to be upheld when the sale of a business is involved.

In all, covenants not to compete should not instill terror in employees. While a properly drafted covenant not to compete can be found to be enforceable, they are rarely written narrowly enoughthat a court would find a particular covenant enforceable.

Using Independent Contractors Can Be Risky Business

Contractors should be cognizant of the Arizona Registrar of Contractor’s Policy Statement regarding hiring independent contractors

Arizona Registrar of Contractors Independent Contractor

The October 5, 2010 hailstorm in Maricopa Countybrought roofing opportunities for roofers who had the ability to handle an onslaught of work. Many roofing companies hired workers as independent contractors to assist with the temporary surge in need. Until now, the Registrar has not weighed in on whether this practice could cause a contractor to be disciplined. The Registrar’s silence has empowered many roofers to hire independents contractors to perform roofing work.

Substantive Policy Statement regarding independent contractors

In response to inquiries after the 2010 hailstorm, in a Substantive Policy Statementissued May 17, 2013, the Registrar has attempted to clarify its position regarding independent contractors. Unfortunately, the policy is unclear and contradictory. However, it appears that the Registrar is saying that contractors may hire independent contractors, and utilize temporary employment agencies, to perform job duties that do not include acts related to a contracting trade. So, contractors are free to utilize clerical workers, accountants, office managers, or other workers for duties that do not include the act of contracting. On the other hand, if a contractor needs an extra worker to perform the skilled labor in which the contractor is licensed, the contractor needs to utilize an independent contractor who is licensed in the trade he is to perform or hire that worker as an employee.

The Policy Statement points out that there is a gray area between a worker who is truly an independent contractor and one who is an employee but being called an independent contractor. In general, the more control the employer has over the worker’s job duties, and how the worker performs his/her job, the more likely that worker will be deemed an independent contractor by a court or the IRS.

In the event a court or government agency determines that a contractor violated laws or regulations, the Registrar can discipline the contractor. The Policy Statement provides examples of such laws and regulations including

  • Failure to comply with social security statutes and rules
  • Failure to provide worker’s compensation coverage or to comply with unemployment benefits coverage
  • Failure to pay income, withholding, or any other required tax
  • Aiding and abetting an unlicensed contractor, or entering into a contract with an unlicensed contractor to perform work for which a license is required

The most likely violation that may get the attention of the Registrar would be the aiding and abetting allegation, or entering into a contract with an unlicensed contractor.

To date, the Registrar has not actively begun to enforce the thrust of the Policy Statement. It took two and one half years after the hailstorm of 2010 for the Registrar to issue its Policy Statement. However, contractors should be cognizant of the Policy Statement and abide by it now and, particularly, when the next hail storm hits.

Refusing to Hire a Convict Can Lead to a Discrimination Charge

When hiring personnel, it makes sense to avoid applicants with criminal histories. An applicant with a criminal history may be more likely to act in ways that could cause trouble for your company. So it may be a surprise to find that companies cannot have policies that automatically exclude persons with criminal histories.

refusing to hire a convict discrimination criminal record

When hiring personnel, it makes sense to avoid applicants with criminal histories. An applicant with a criminal history may be more likely to act in ways that could cause trouble for your company. So it may be a surprise to find that companies cannot have policies that automatically exclude persons with criminal histories.

How could this be? The Department of Laborand the EEOC have opined that policies that exclude all individuals based on criminal records and that do not consider the nature and age of the offense may violate federal laws. According to the Department of Labor and the EEOC, this is because the policy may have an adverse impact on certain racial or ethnic groups.

The three-factor test to avoid a discrimination suit

If an employer’s policy of not hiring applicants who have been convicted of crimeshas a negative impact on a racial or ethnic group, the company may still avoid a claim of racial discrimination by the EEOC. To avoid such a claim, the employer should be able to show that the policy is related to the job and is a business necessity. It can do this by following guidelines published by the EEOC. However, these guidelines are all but impossible to comply with. Alternatively, the employer can analyze how the policy relates to the job and whether the policy is a business necessity by using a three factor test. The three factors are

  1. the nature and gravity of the offense;
  2. the amount of time that has passed from the offense or sentence; and
  3. the nature of the job the applicant is seeking.

The EEOC has produced a list of “best practices” to follow in avoiding liability for discrimination. They include

  1. making sure any policy requires independent assessment of the applicant;
  2. narrowing the policy to
    1. the essential job requirements and circumstances of the jobs themselves;
    2. the specific offense, or types of offenses, that may demonstrate they are unfit for the job; and
    3. an appropriate duration between the offense and when the applicant is being considered
  • not asking for a criminal history, or limiting the questions to convictions that would be job-related to the particular position consistent with business necessity; and
  • keeping the applican’ts criminal history confidential.

It seems unimaginable that the EEOC would charge a roofer in Arizona with discrimination based upon race or ethnic groups because the most of the roofing workforce is some type of ethnic minority and many have criminal records. However, government workers are unpredictable. You never know when a government enforcement worker will decide to try to make a name for him or herself by bringing a discrimination claim based upon a blanket policy of not hiring convicted applicants. A wise businessman should at least consider implementing a policy that addresses the three factors listed above.