The Utah employment agreement is a document that states an employer’s terms and conditions to potential employees. Employment agreement are essential to the working relationship of both parties as they must agree upon the compensation offered to the employee for the duties they perform. The contract also provides clarity into the schedule, or “employment period,” in which the designated duties must be executed. Through the completion of the agreement, the employer protects their assets and removes themselves from certain liabilities in the event of a legal claim filed against them by an employee.
Utah Legislature Imposes Limits On Post-Employment Non-Competition Covenants
The Utah Legislature recently enacted the Post-Employment Restrictions Act (Act), which took effect on May 10, 2016. The Act restricts non-competition agreements with employees. It does not limit non-solicitation, non-disclosure, or confidentiality agreements. The Act applies to non-competition agreements executed after May 10, 2016, and to non-competition agreements entered into prior to, but renewed after, the effective date of the Act. Employers should be aware of the Act and ensure that all non-compete agreements they use after May 10, 2016 comply with the Act. The Act provides that “an employer and an employee may not enter into a [non-competition agreement] for a period of more than one year from the day on which the employee is no longer employed by the employer.” Any agreement that restricts competition for more than one year is void (not merely voidable).
Two types of agreements are excepted from this restriction:
1. a severance agreement and
2. an agreement related to the sale of a business.
Under the Act, post-employment non-compete agreements must still comply with the common law. For example, the agreement must still be supported by consideration, must be free of bad faith in the negotiations, the restriction must be reasonably necessary to protect the company’s goodwill or other legitimate business interest, and the restrictions must be reasonable as to time, scope of activity and geographic area. The Act penalizes employers whose agreements are found unenforceable: “If it is determined that the post-employment restrictive covenant is unenforceable” then the employer is liable for the employee’s “costs associated with arbitration,” “attorney fees and court costs,” and “actual damages.” Employers should carefully review their current employment agreements and consider the limitations and restrictions imposed by the Act when entering into future non-competition agreements, and when contemplating steps to enforce them in litigation. The Act consists of a scaled-down version of the bill (HB 251) which is much better for Utah businesses than the original bill. The original bill sought to prohibit most post-employment restrictions. Under the Act, Utah businesses are still able to establish post-employment limitations on competitive activities for proper reasons. State law governs most post-employment restraints, and since the rules vary significantly by jurisdiction, restrictive covenants must reflect the limitations acceptable under the law likely to control. The covenant not-to-compete must define the scope of prohibited activities, where the prohibition applies, and how long it will last. The reasons that the company requires protection against unfair competition should be stated, such as employee access to confidential information; relationships with customers, suppliers, and others; and/or knowledge of operations, plans, finances, etc.
Fundamental Employee Rights
Absent a covenant not to compete or breach of a confidential relationship, employees may plan to compete with their employer while still employed and can leave employment and compete with a former employer.
Protectible Interests of Employers
When an employee’s position enables the employee to learn proprietary information, the employee’s departure exposes the business to unfair competition by the former employee because knowledge of his former employer’s confidential information, operations, and customers may provide an undue advantage. In most jurisdictions, employers have a limited right to protect against such competition, and restrictions that are reasonably necessary to protect an employer are valid. Any ambiguity in a post-employment agreement will be construed in favor of the employee. In suits to enforce restraints, employers bear the burden to show that the restraint is no greater than necessary to protect a legitimate business interest; is not unduly harsh in curtailing an employee’s ability to earn a livelihood; and is reasonable. Prohibiting a former employee from employment in any capacity by a competing company is often deemed unreasonable. When an employee is hired, it is appropriate to obtain a representation that the employee is not covered by any agreements restraining the employee’s right to perform the duties of the position, and that the employee will not disclose any former employer’s confidential information.
Consideration for Enforceable Agreement
An agreement must have consideration flowing to the employee. Accepting employment at-will is sufficient consideration to support a restrictive agreement by an employee. But if the only consideration for the agreement is the employment itself, courts diverge on whether an enforceable agreement restricting post-employment competition must be signed before employment commences. In some states, although an employer never mentioned at the time of hiring that there would be any post-employment restrictions on competition, courts will enforce a covenant signed after employment commenced. In other jurisdictions, non-compete agreements are void for lack of consideration when employers fail to include them in the original terms of employment. Even in states where continued employment is insufficient consideration for a covenant signed after an employee began working, when the agreement is supported by independent consideration, it will be enforceable. A wage increase, a bonus, a new benefit, or a change in status can be sufficient consideration for covenant agreed to after employment commences.
Lack of durational and geographic limitations renders an agreement void. A former employee’s agreement not to compete against his ex-employer will be upheld if the restraint is no wider geographically and no longer in duration than reasonably necessary to protect the business of the employer. Determining the reasonableness of a restraint requires an examination of surrounding circumstances, including the nature of the employer’s business, the subject matter, the purpose served, the situation of the parties, the nature of the former and subsequent employment of the employee; whether the employee is highly skilled or unskilled; and whether the covenant is necessary to prevent the solicitation of customers.
Most courts will enforce contractual agreements restricting a former employee from poaching employees after the employment relationship ends. Such agreements, like covenants not to compete, must be supported by consideration.
Effect of Termination
Some states deny enforcement following a termination, depending whether termination was for cause or not. In such jurisdictions, if the employer has materially breached the employment agreement in terminating the employee, courts will not enforce a post-employment restraint. In some jurisdictions, courts will not enforce restraints against employees terminated without cause. By its terms, the agreement imposing post-employment restraints should apply regardless of whether the executive resigns, or is terminated with or without cause. One strategy for promoting compliance and achieving enforcement is to tie the period of the restraint to a severance package. In circumstances involving a termination without cause, where a severance package will be paid over time, severance payments may be conditioned upon compliance with the post-employment restraint.
A prompt injunction precluding competition by a former employee is usually the essential relief to avoid competitive harm. In general, an employer seeking to enjoin a former employee from competing pursuant to a contract must establish four elements: likelihood of success on the merits; greater injury would result from not enforcing the agreement than from enforcing the restrictions; irreparable harm will occur unless the injunction is granted; and the public interest would be served by granting the injunction. The agreement should contain an acknowledgement that, because of employee’s knowledge and role in the company, a breach of the agreement not to compete would cause irreparable harm, the restraint would not prevent the employee from earning a living, and immediate injunctive relief to prevent the breach would be essential. The duration of an injunction may run from the date of the court’s order, or from the termination of employment.
Former employees may also be liable for monetary damages measured by the net revenue lost due to the competition, disgorgement of the employee’s profits, as well as other tort damages. Some jurisdictions will enforce a liquidated damage provision in an agreement not to compete, provided that they are not a penalty. Caution must be exercised, however, because in some jurisdictions, the presence of a liquidated damage clause may preclude injunctive relief.
A post-employment agreement should define what activities are prohibited, where the prohibition applies, and how long it will last, citing the reasons why protection is necessary. A prohibition against solicitation of customers is also valuable in preserving relationships with customers. Post-employment restraints should apply regardless of whether the executive resigns, or is terminated with or without cause. By linking the period of the restraint to the payout under a severance package an employer may increase the probability of compliance with the restraint, as well as the likelihood of success in its enforcement.
What Are Post-Employment Restrictions And Why Are They Tricky?
Post-employment restrictions (or restrictive covenants) are contractual clauses prohibiting employees from doing a specific thing after their employment ends, e.g. they must not join a competitor. PERs are void as an unlawful restraint of trade unless they go no further than necessary to protect the employer’s legitimate business interests. In other words, if PERs are not reasonable, they are void. Reasonableness depends on the specific facts of the case so it is inherently hard to predict whether a court will enforce the covenant. Even carefully drafted restrictions sometimes fail.
What kind of restrictions may be enforceable?
Reasonable PERs aimed at stopping misuse of the employer’s confidential information or business relationships can be enforceable.
To achieve this, employers may be able to prevent employees:
• joining competing businesses (non-compete clauses)
• poaching other employees (non-poaching clauses)
• soliciting customers and/or doing business with customers (non-solicitation clauses).
• Such PERs still must be reasonable in scope, area and duration.
How Can I Make Sure My PERs Are Reasonable?
• Use them sparingly, only where you have a compelling business need and make sure they are limited in time and space. Blanket restrictions for all staff will undermine your case.
• Identify exactly what information or relationships you are trying to protect specific to the particular job role.
• Choose the minimum type, area, scope and duration of PERs which is adequate to protect the specific information or relationships you have identified. One size does not fit all.
• Non-compete clauses are the hardest PERs to enforce. Only use them when no other restriction will do. This will help show you are reasonable.
Importance of an Employment Agreement
Employment Agreement are important for both employee and employer. It bonds both parties to do their duties and responsibilities. For an example: The basic duty of employee is to work for employer and Employer should pay employee according to work within certain time frame. Employment Agreement is legally definitions that state the relationship between two parties as Employer and employee. An employment Agreement will create a strong basis for protecting both your parties’ interest and the employee’s specific role in the company. It will hold details as the employee responsibilities, their health insurance policy, sick days, annual leave days, reasons for why their employment may be terminated, and much more. Generally, agreement of employment is poorly drafted and inadequate and in many cases there is verbal agreement that mean there is no written terms and condition. Such scenario may bring difficulties for parties.
• Job security for Employee and Labor certainty for employer: This is most important purpose of employment agreement. A employment agreement includes the time frame about how long an employee is contracted to stay with the company, for example, two or five years. This ensures the job guarantee for employee where as Employer can be positive about staff dropping off job, as long as they do not violate the terms of the contract. The employment agreement should also specify exactly what actions can result in termination. Including this information ensures that each employee knows which activities are mandatory to their role and which actions or behaviors are against company policy and will result in dismissal. Condition for termination maintain ecosystem in between both employee and employer to be honest and genuine with each other. So in sense violation of term might lead to termination of employee, but employee can feel job security if both parties has signed employment contract.
• Understanding of duties (Employee and Employer): The very fundamental things an employment agreement will have is position and duties of the employee. This will assure employee about his/her day to day task or his/her ultimate goal. Agreement also helps employer to expect good performance from employee. If an employee is consistently underperforming and not meeting the agreement set out in their contract, their employer will have reason to take action. Employer also have responsibility to pay to employee, facilitates with different incentives, bonus or benefits. The pay rates, income, benefits bonus etc should be clearly mention in contract and employer should follow accordingly as a duty.
• Key to Protect Employee Right: The employment agreement is a right savior for employee. Basically agreement should be drafted according to Employment Act, different countries follows different Act. Agreement determines you wages and how often you will be paid and again it also includes about overtime and many other dimension. As an employee you should know about your right and make sure the contract covers it. But you should always find some time to know about Employment act in your place before signing agreement.
• Employment agreement is a best way to maintain trade secret or Confidentiality for employer: Employer have to provide access to confidential company information and data and even the trade secret formula. So including confidentiality terms in employee is best way to protect them with this clause in place, employees are prevented from disclosing sensitive or confidential information to others. This can include being released to the media or public, shared on social media, or being used for any other purposes. If an employee was to breach their contract in this way, their employer is able to take legal action against them. Employer may include different restrictive clauses like the non-competition, non-solicitation, non-dealing, and non-poaching clauses.
• Dispute Resolution: A good employment agreement reduces the disputes between two parties that minimize time and expense of a courtroom battle that neither party can afford. Contract bond employee and employer in certain boundaries that minimize the chances of disputes.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506