Turner Padget Insights

How to Write a Workable Non-Compete Agreement

Posted On Feb 18, 2015

Employers invest time, training and trust in key employees, and they don’t want to see them walk out the door and help a competitor. Non-compete agreements can protect your investment in employees – but only if they’re written with reasonable restrictions.

In South Carolina, “reasonable” means that non-competes must be written narrowly, not placing arduous restrictions on a former employee’s right to earn a living and not used to gain an unfair competitive advantage in the marketplace. The South Carolina courts are driven in this area by the principle of not doing anything that discourages fair competition and free enterprise.

“Reasonable,” of course, is in the eye of the beholder, but the courts have provided guidance. Based on South Carolina statutes and case law, here are the key points you and your lawyer must consider when crafting a non-compete agreement.

It must protect an employer’s legitimate business interest 

Business owners naturally view losing an employee they have trained as undermining their business interest, but the courts take a narrower view. The courts are particularly sensitive to agreements where the intent is punitive, rather than protecting a legitimate business interest. 

For example, a physician who leaves a practice and opens an office in the same community would likely be regarded as undermining the former employer’s business interest. But setting up a new practice in a town an hour’s drive away likely would not be deemed as a threat to the former employer. 

More than two years may not be reasonable

A non-compete must be limited to a specific amount of time, and like some other elements of these agreements, the courts have provided only general guidance. Clients often want longer terms, but we usually advise them to limit an agreement to no more than two years, which the courts usually regard as reasonable.

Agreements are limited to where you do business 

Non-competes must be limited to a defined geographic area, and this sometimes gets employers into trouble because they may want an agreement to say that a former employee can’t compete anywhere the company does business – or perhaps aspires to do business.

For employees involved in sales, a non-compete agreement must be limited to their sales territory, not the company’s overall market area. The same principle would be true for an employee involved in any type of client service. If a copy machine technician served customers in only one county, but the company has customers across the state, an agreement could cover only the county where the technician worked.

Instead of specifying a geographic range, an agreement can place current customers off limits to a departing employee. “Current” is the operative word because the courts have not approved agreements that include previous or prospective customers.

You can’t stop someone from earning a living 

A former employee should be able to continue to earn a living in his or her chosen field, albeit perhaps with different customers or in a different geographic area.

For example, an agreement would be unlikely to survive court scrutiny if it forbade a restaurant manager from working anywhere in the food industry. An agreement that placed direct competitors in a competitive geographic area off limits probably would be okay, however. 

What’s in it for the employee? 

Ask new employees to sign a non-compete as part of their acceptance of a position. This means before they start to work. An agreement signed by a current employee – even one employed just a few days – requires that a benefit be given to the employee in return for signing the non-compete. There is no absolute scale of what constitutes a benefit, but the courts have said it must be something of more than token value. A $50 gift card or new title that doesn’t result in a raise probably won’t cut it. “You get to keep your job,” definitely won’t pass muster as a benefit. A meaningful bonus, raise or upgrade in status is required, and that makes an employee’s annual review a good time to ask for a non-compete. 

And if they don’t sign? South Carolina is an at-will employment state, meaning you can terminate an employee for any reason that doesn’t violate the law. You’ll be on shaky legal ground, however, if you fire someone following their refusal to sign a non-compete, because the law says you can’t require them to sign. 

South Carolina loves free enterprise and competition

We know, if you own a business, by definition you’re a supporter of free enterprise. But when it comes to non-compete agreements, the South Carolina Legislature was very concerned with maintaining a level playing field between business owners – who have a right to protect their investment – and employees – who own their right to make a living. This is public policy in South Carolina, and judges will assess if an agreement is faithful to the spirit of the Legislature’s intention.

The No. 1 mistake is overreach

It’s important to note that in South Carolina non-compete agreements, you can’t just throw everything against the wall and see what sticks. If one provision of an employment agreement is ruled invalid, then the whole agreement will be thrown out, ultimately. Judges in our state are not allowed to “blue pencil” an agreement; that is, strike offending provisions while retaining those that are legal. If you ask for everything in a non-compete agreement, you may get nothing.  

Your legal counsel can advise you on how to write a non-compete agreement that provides the most protection for your business and that will survive a legal challenge.  

Julie Jeffords Moose is a shareholder in Turner Padget’s Florence, S.C., office. In light of her experience as a licensed certified public accountant in South Carolina from 1987 to 2005, Julie is well-positioned to handle legal matters involving complex accounting, financial and business issues. In addition to handling business litigation, Julie provides counsel in drafting corporate and organizational documents, including contracts, operating agreements, employment contracts and other business agreements. She may be reached at (843) 656-4418 or by email at jmoose@turnerpadget.com.