What Is a Non-Compete Agreement?
Non-Compete Agreements are written agreements between employers and employees where the employee contracts not to engage in a particular profession, business, or trade in competition against the employer, which is usually located in the same area as the employee. The purpose of such agreements is to protect the employer’s business from competitors when an employee leaves and possibly takes its client list or otherwise its confidential information. In general , if the employee breaches the non-compete agreement, she faces the prospect of being taken to court, where a judge will decide whether to enforce the agreement, and if so, what the damages (if any) will be.
New Hampshire Non-Compete Laws
New Hampshire follows the "common law" approach to non-compete agreements, requiring that such agreements be carefully constructed and that the covenant not to compete be reasonable in scope.
In 2006, the New Hampshire legislature amended RSA 275:70, and enacted a new law RSA 275:70-b, c., which may have an impact on non-compete agreements for hourly (non-exempt) employees. The new law prohibits all employers from entering into "no hire" agreements with an employee’s existing employer, and it also prohibits "non-compete" agreements with hourly (non-exempt) employees. A non-compete agreement is defined in the new law as "any covenant or clause intended to prohibit an employee from securing employment with an employer other than a particular employer or employers." This new law does not appear to define "other than a particular employer or employers", but the language seems to be broad enough to cover most non-compete agreements. We expect there will be litigation on that question and will update this post once we learn more about how courts interpret that provision of the statute.
This newly enacted statute only applies to hourly workers. As a result, employers can continue to use non-compete agreements in the typical sense with salaried employees (executives, managers, etc.), but shouldn’t expect that enforcement will be easy if the non-compete agreement isn’t carefully drafted.
When Are Non-Compete Agreements Enforceable In NH?
Non-compete agreements are enforceable in New Hampshire as long as they meet the common law standard of reasonableness with respect to the scope, duration and geographic area of restrictions on employees. The reasonableness standard has been explained by the New Hampshire Supreme Court as follows: Whether a … covenant is reasonable depends upon the facts and circumstances of each case. In determining whether a covenant is reasonable [the court] must consider and balance the interests of both parties. The employer has an interest in the protection of its property and the employee has an interest in securing and holding employment. "If the employer’s interest outweighs the employee’s in the particular industry and if the restrictions are no broader than necessary to protect the employer’s interest, a covenant will be enforced. As a general rule, the restraint must be reasonably necessary for the protection of the employer’s business." Davidson and Jones, however, cautions courts to be wary of overzealous employers who attempt to extract more than the law allows. Too frequently, employers impose unnecessarily broad restraints upon their employees in order to obtain some advantage, and then seek judicial enforcement of those restraints. The employee’s burden in any given case is then to prove that the particular restraint at issue is more extensive than necessary. In making this determination, the trial court should consider the purpose of the restriction, the equities of the parties, the method of the restraint and whether the agreement will prevent the employee from supporting himself or his family. In particular, and statutorily, the general rule in New Hampshire is that for "any person who engages in or carries on any canvassing, peddling, or soliciting business in any town, city, or place of more than 2,500 inhabitants, either by house to house, shop to shop, or by other methods," a non-competition agreement must meet the requirements of a "specific contract" under NH RSA 275.70, which provides: No provision contained in, or made with respect to, any contract of employment shall relieve an employee from any obligation imposed upon him or her by the provisions of this chapter with respect to the rights of other employees, unless the provision is part of a specific contract made in writing, under seal by the employer and employee and expressly providing that it was intended to be in lieu of such provisions of this chapter and specifying what the specific provisions are.
How Do These Agreements Affect Employees and Employers?
For existing employees, the impact of a non-compete agreement can be significant. In New Hampshire, a non-compete agreement is not automatically void and many times will be enforceable even when restrictive of geographic area and time. Even when an employee feels that a non-compete agreement in New Hampshire is over reaching in terms of the time or the geography, there exists no right to refuse to abide by the agreement. While New Hampshire may ultimately refuse to enjoin the employee from future conduct in violation of the agreement, such a determination will not be made until an initial summary hearing on the merits. By then it is possible that an employer will have already taken final steps based on a breach finding at the first hearing and the employee may have lost his job.
For employers, a non-compete agreement can be both a blessing and curse. When enforceable, a non-compete agreement can have the effect of ensuring that proprietary information and trade secrets are not misappropriated by the departing employee. It can also assure that customers and clients are preserved when a person with special knowledge of them leaves and desire to compete. However, because New Hampshire usually enforces a non-compete agreement against all employees without concern for position, the cost of defending a lawsuit brought under a non-compete agreement where there is no undue competitive harm can be significant. A suit under a non-compete agreement also comes with a built-in threat of more significant damage, as a court can find specific performance in favor of the employer, requiring a termination of the employee who has been found to be in breach of contract.
Alternatives To Non-Compete Agreements
Many New Hampshire businesses have found effective strategies that do not involve a non-compete agreement but still help ensure their business interests are protected. One option is a properly drafted confidentiality and/or non-solicitation agreement. A confidentiality agreement, also known as a non-disclosure agreement, says essentially this: you can’t use or tell anyone about, any of our confidential information—in fact, it’s yours! A non-solicitation agreement prohibits an employee from soliciting anyone to work for a competitor or from soliciting employees or customers away from his or her employer . If the agreement has been carefully drafted with the assistance of an attorney, then these types of agreements usually will satisfy the overall goal of preventing an employee from taking valuable confidential information and/or employees or customers from a company.
Guidelines For Drafting An Effective & Enforceable Agreement
A legally valid non-competition agreement in New Hampshire must satisfy six elements: (1) it is in writing; (2) it involves a provable business interest; (3) it is supported by reasonable consideration; (4) the restraint is reasonable in time, geographic scope, and scope of activity; (5) it is not against public policy; and (6) there is no undue hardship on an employee.
- It Is in Writing. A covenant not to compete must be in writing to be enforceable. New Hampshire requires that both the employer and employee sign it.
- It Involves A Provable Business Interest. The employer must show a legitimate business interest that deserves protection. Courts in New Hampshire have recognized that protectable interest may be goodwill, client contacts, trade secrets, or specialized training.
- It Is Supported by Reasonable Consideration. In New Hampshire, like other states, a non-competition agreement must be supported by adequate consideration. This means that an agreement entered into during employment requires more than continued employment to support it. Rather, the employee should receive additional value for signing the agreement. Any number of things can constitute valuable consideration, such as a bonus, tailored training, a specific position, a raise in compensation, or elsewhere.
- The Restraint Is Reasonable in Time. A covenant not to compete must only be for a reasonable period of time for the trade, field, or business being pursued. Although no bright line rules exist, New Hampshire courts have routinely upheld one year as reasonable. However, New Hampshire courts have also considered enforceable covenants going as long as five years as long as the restraint is geographically limited and at the same time the nature of the business necessitates a longer time period.
- The Restraint Is Reasonable in Geographic Scope. The court will consider the nature of an employer’s business and whether the restriction unduly impairs the employee’s ability to make a living, on one hand, or whether it is necessary to protect the employer’s legitimate business interests, on the other. Therefore, a covenant not to compete may be too broad where it would spell certain financial doom for the employee, but reasonable if it were simply a burden on the employee’s ability to make a living. An example of a reasonable geographic restriction is one that prohibits the employee from working in the entire state of New Hampshire but uses language that suggests the employer may not necessarily take action against the employee for competing against a former client outside of the state.
- It Is Not Against Public Policy. Finally, the restraint must not be contrary to public policy. A covenant to compete is valid if it does not have an adverse impact on the public.
Legal Help and Resources
Employers should always consult with an attorney regarding the use and scope of the non-compete agreements. Remember that you as an employer may need to provide the employee with some form of consideration in addition to employment in order to enforce the non-compete agreement. A promise to continue employment is generally not enough. The consideration may be a signing bonus, additional pay, benefits, or continued employment in a booming market.
Employees should also consult with a knowledgeable attorney if they are presented with a non-compete agreement. Employers often present a one-sided document to the employee and that document may be overbroad. Employees should consider the employer’s legitimate business interest in restricting competition when evaluating their agreement. In addition, the employee should consider negotiating for reduced restrictions. For example , an employee may be able to negotiate around a non-compete agreement and instead sign a non-solicitation agreement that prevents them from soliciting their employer’s customers and employees for a limited period of time. Not all employers have business interests that warrant a non-compete agreement.
Sometimes it may not be possible to negotiate for a more restrictive covenant. For instance, it is fairly common in the medical field for doctors to be tied to a restrictive covenant as part of a buy out of a practice. Doctors who have a patient following and who want to leave a restrictive covenant should consider having a plan in place so they don’t lose that business and patient following.
For further information on non-compete agreements please refer to NH APPENDIX I – Non-Competition Agreements (PDF) in New Hampshire Law Library Online.