Author: Attorney Elizabeth L. Spencer
When an employer and an employee end their employment relationship, there are many loose ends that need to be tied up. One area that employees should review and employers should be monitoring is the status of any non-compete agreement and any restrictive covenants.
A non-compete agreement is a restrictive covenant in which an employee is restricted from engaging in specific business related activities or work for a set span of time after his employment ends. Wisconsin law regarding non-competes is found both in statute and case law. Wis. Stat. § 103.465 governs restrictive covenants in an employment context. Wisconsin law allows for covenants not to compete with an employer or principal during the term of the employment, or after the termination of that employment, within a specified territory and during a specified time is enforceable if the restrictions are reasonably necessary for the employer’s protection.
In interpreting non-compete agreements for compliance with Wis. Stat. § 103.465, the Wisconsin Supreme Court has applied a 5 part test that includes additional factors which the restrictive covenant is evaluated against. Lakeside Oil Co. v. Slutsky, 8 Wis. 2d 157, 98 N.W.2d 415 (1959). These factors include:
1. Necessity for protection against unfair competition. Employers are not entitled to protection against actual competition that any stranger could give. If there are specific facts which make the non-compete necessary to protect the employers interest or business it will likely be valid.
2. Reasonableness of the time period of the restriction. Non-competes must include a time limit, but that time limit must also be reasonable. Determination of the reasonableness may include like the duration of the former employees’ employment.
3. Reasonableness of restraint as to the territory. A reasonable restrain as to territory typically applies to geographic territory. However, agreements lacking a geographic component but alternatively focus on a specific activity or have a limitation on particular customers or groups may also act as a limitation on territory.
4. The restrictions reasonableness as to the employee. The court examines a variety of sub factors including the employee’s age, education, general economic conditions, including scarcity of employment opportunities, and the restriction’s impact on the employee’s freedom to utilize his or her employment skills in another area or manner.
5. Public Policy Interests. This factor has been addressed by the courts the least but originates from the general public having access to the employee’s services.
How does this affect employers or employees?
Both employers and employees should be aware of what kind of agreements Wis. Stat. § 103.465 applies to and the factors related to their enforcement. The scope of Wis. Stat. § 103.465 is limited to employment agreements and is not applied to non-employment context. For example, it does not apply to restrictions related to the sale of a business or to stockholder agreements. The following types of agreements fall within the scope of Wis. Stat. § 103.465:
• Non-competition agreements. Agreements that limit competition during and/or after the employment relationship.
• Customer non-solicitation agreements. Agreements that limit competition by restricting the activity of an employee with respect to clients or customers.
• Confidentiality Agreements. Agreements that restrict the use and disclosure of information in the public domain regarding the previous employer’s business.
• Employee Non-solicitation agreements. Agreements that restrict the solicitation of an employer’s employees.
• No-hire agreements between employers. Agreements which restrict hiring the other employer’s employees.
If you are an employer looking to create a new restrictive covenant agreement or enforce an already existing agreement, consider having it reviewed by a competent attorney familiar with the enforcement of these agreements.
Former employees should also consider having restrictive covenants reviewed before obtaining work with a new employer to ensure that they are not in violation of the agreement or if they suspect the agreement may not be enforceable.