Non-Compete & Arbitration Clauses in Employment Contracts: Are they Valid?

You were extended a job offer. Your soon-to-be employer hands you a contract that you are eager to sign, but within the lengthy agreement you spot language prohibiting you from later competing with your new employer and requiring all disagreements to be handled through arbitration. What does that mean?

Attorneys are seeing increasingly more employee non-compete and arbitration agreements being imposed upon hourly-wage service workers. Often, employees sign-off on these agreements, discretely embedded in lengthy forms or placed within stacks of paperwork, without even realizing what they are agreeing to – or what the implications might be.

Generally, an arbitration agreement means that, if a dispute arises between employer and employee, both parties will forgo the court system — a lawsuit before a judge or jury, or class action litigation — in favor of a private proceeding decided by an independent, mutually agreed-upon third party.

Arbitration has been used for years in commercial disputes, and is not inherently biased against employees. Problems can arise, however, when employees enter into an arbitration agreement unknowingly, and without negotiating its terms. Before signing any documents from an employer, employees should read and understand the terms of the agreement.  An arbitration agreement may not seem like a big deal to someone starting a new job, when no legal issues are on the horizon, but if an employer-employee dispute arises later, the arbitration requirement could make the difference between winning and losing your case.

A non-compete agreement usually restricts an employee from entering into a similar profession as the employer or from directly competing against the employer for a period of time. Non-compete agreements have typically been reserved for managers or upper-level employees who could potentially exploit a company’s inside-information should they leave the company and join a rival organization.

Today, however, it is becoming more common for employers to impose these requirements on even lower-level employees. For example, current and former Jimmy John’s employees recently sued the restaurant operator over what they alleged to be an overly restrictive non-compete language.  The agreement prohibited the sandwich makers from working for any, defining “competitor” as any business that generated more than 10 percent of its revenue from sandwich sales.

Though employers have the right to impose non-compete agreements to protect their business interests and trade secrets, these agreements cannot be overly restrictive on their employees. Courts, for example, will generally not approve of a non-compete agreement that limits a former employee’s right to earn a living.

Now more than ever, employees have to understand their rights and how to protect them. If you feel that a non-compete agreement, an arbitration clause, or other aspect of your employment contract is unlawful, please contact the attorneys in Sommers Schwartz’s Employment Litigation Group today – we’re here to help.