In the internet age of today where employers and employees alike are exposed to countless stories, opinions, blogs, articles and “expert reports,” it can be difficult to distinguish fact from fiction, myth from reality and legal from illegality. One such common myth is that non-compete agreements are unenforceable in North Carolina.
Recently, the Federal Trade Commission (“FTC”) acted to bar most agreements, both retroactively and moving forward, with only minor exceptions not applicable to most employees. A nationwide injunction entered before the FTC’s rule went into effect, which injunction remains in place currently. (See our April 24, 2024 Blog “FTC Votes to Bar Most Non-Competition Agreements, But Don’t Throw Out Your Noncompete Yet!”) Hence, in North Carolina, the enforceability or lack of enforceability of a non-compete restriction depends upon North Carolina case law.
While North Carolina courts haven’t always favored non-compete restrictions placed upon employees, it has and will subject to various restrictions, enforced them. Specifically, for a non-compete restriction to be enforceable, the restriction must be (1) in writing; (2) be supported by consideration; (3) reasonable as to the time it is to last and the territory restricted; (4) necessary to protect the legitimate business interests of the employer and (5) signed by the employee. While the meaning of some of these requirements is clear, others may be less so and there are few hard tests or rules. For example, consideration can be, for a newly hired individual, the job itself, but for current or existing employees, it cannot be the opportunity to keep their job and needs to be something like increased compensation, additional leave, promotion, additional territory that may lead to additional compensation, or some other newly provided benefit given to the employee. Similarly, when considering whether the length or territory covered by a non-compete restriction is reasonable or not, North Carolina’s courts often take into consideration whether the impacted or restricted individual agreed to the restriction in connection with the sale of his or her business or is a “routine worker” that agreed to the restrictions as a part of his or her acceptance of a position. While our courts are more likely to give greater leeway to restrictions tied to the sale of a business, under either scenario, the longer the length of the restriction the more narrow the geographic area should be and vice versa to ensure enforceability. Finally, the restriction must be tailored narrowly enough to protect the actual business interests of the employer.
Each of these requirements is carefully analyzed by the courts and prudent employers (or their counsel) should pay attention to new developments or leanings in what is considered reasonable versus unreasonable or acceptable versus unacceptable. Should any one of these requirements fail such analysis and the guidance given by prior case law, North Carolina courts are prohibited from blue-penciling or fixing the issue, leaving employers with a worthless restriction that cannot be enforced and, therefore, cannot provide the intended protection to their business. Hence, savvy employers will seek the assistance of a North Carolina counsel well versed in employment law to create valid and enforceable non-compete restrictions necessary to meet their needs and withstand future challenge.
As a business owner, whether you’re exploring the use of a non-compete agreement for the first time or have concerns about the validity and enforceability of existing agreements, reach out to one of our corporate attorneys in Greensboro, NC to learn more.