4 Limitations on Texas Non-Competition Agreements

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4 Limitations on Texas Non-Competition Agreements

If you plan to ask employees to sign Texas non-competition agreements, it is important to understand their limitations. Indeed, the Federal Trade Commission’s recent announcement of a proposed rule that would ban noncompete agreements altogether should be a sign to business owners to take a hard look at their employee agreements.

Non-competition agreements, or “noncompetes”, cannot keep employees from leaving for a new job. What they can do is create some limited restrictions on which kinds of jobs employees can take or information they can use at the new job. Your non-competition agreements need to be enforceable, with time, geographic, and scope limitations described in them. Texas law specifically states that these limitations must be “reasonable” and must not “impose a greater restraint than is necessary to protect the goodwill or other business interest” of the business owner.

  1. Enforceable Agreement

First, a noncompete clause must be part of an otherwise enforceable agreement. In other words, you cannot enforce a noncompetition provision if other parts of the agreement are found to be against the law. Moreover, the law indicates that businesses should offer something to the employee in exchange for their agreement to sign the noncompete. To add even more complexity, there are special requirements for physicians’ non-competition agreements. Speak to your business lawyer about how to comply with the complex laws on enforceable noncompetes in Texas.

If you have not yet asked your employees to sign a non-competition agreement, now is a great time to speak with our business law firm. We can help you get set up with the various agreements you need for your business to run smoothly. If you have already had employees sign agreements, our team can assist by reviewing the agreements to verify that they are enforceable and protect your business as much as possible. Having a lawyer prepare or review your business’s agreements could prevent issues surrounding those agreements in the future, if you need to enforce them.

  1. Time Limitation

Second, a Texas non-competition agreement must contain a reasonable time limitation. A noncompete cannot last forever – this would be an unreasonable restraint on trade. Instead, your agreement needs to state how long it will last. The law doesn’t say what would be a reasonable time limitation. You and your lawyer can discuss what would be appropriate given your interest in protecting your business. Typically, a one- to five-year limitation may be appropriate depending on the circumstances.

  1. Geographic Limitation

Third, you need to include a geographic limitation in your Texas non-competition agreement. In other words, your agreement cannot prohibit your employees from working anywhere in the world for the competition. Instead, the geographic limitation should be reasonable. Your agreement also needs to state how the distance or area limitation is calculated.

Many businesses are fully aware of who their local competitors are and seek to restrict employees from going to work for those competitors. If you have not yet done market research to identify nearby competitors, now is the time to work with your lawyer on this issue. You can customize your geographic limitation to include the locations of your competitors.

  1. Scope Limitation

Finally, your noncompete must include a scope limitation. Scope simply means that you must describe which actions the agreement prohibits. For example, you may want to restrict former employees from contacting your customers. In Texas, outright prohibiting employees from working in certain industries or occupations is likely not going to be enforceable. Your agreement should be narrowly tailored to prohibit the types of competitive activities that could be detrimental to your business. Again, it’s a great idea to speak with a business lawyer about the scope limitation in your noncompete agreement before you ask employees to sign.

Let Us Help

At Henke & Williams, LLP, our experienced Houston business lawyers help our clients find the best solutions possible. Whether your business needs help with non-competition agreements or is going through a business divorce, we’re able to assist with tailored advice. To set up a consultation, call 713-940-4500 or use our convenient Contact Form.

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