Given employers' increasing use of post-employment non-competition restrictions and an increase in litigation relating to post-employment non-competes, counsel must draft non-competition provisions to maximize enforceability.

When drafting non-competition provisions, whether as part of an employment agreement or a stand-alone provision, employers should ensure the provisions comply with applicable state law. For example, under California law, post-termination non-compete agreements are generally void, unless they are executed in conjunction with the dissolution or sale of a business entity by:

In states that permit post-employment non-compete agreements, courts generally apply a reasonableness standard to ensure the restrictions are not overly broad in scope or duration in protecting the employer's legitimate business interests.

For more information about specific state laws and to compare non-compete laws across jurisdictions, see Non-Compete Laws: State Q&A Tool.

In addition to state law considerations, non-compete agreements must take into account other issues, such as consideration and non-solicitation provisions. For more information on issues to consider when drafting non-compete agreements, see Drafting an Employee Non-compete Agreement: Best Practices Checklist.

When negotiating non-competes for senior executives, employers should learn the restrictions being imposed by their competitors and peers and the compensation paid for those restrictions to determine current industry practice. Employers concerned about the enforceability of non-compete restrictions should consider paying the executive throughout the duration of the restriction. Some employers accomplish this by paying severance amounts over the non-compete period.

Depending on the amount and duration of the payments and whether the employer has the right to terminate the non-compete restriction and related payment obligations, the payments may be subject to the restrictions of Section 409A of the Internal Revenue Code of 1986 and should be structured to either comply with or be exempt from Section 409A (IRC § 409A).

To compare specifics of post-employment non-competition provisions, including scope, duration and severance obligations, contained in senior executive employment agreements from various public companies, see What's Market, Executive Employment Agreements. For more information on non-competition provisions in executive employment agreements and other negotiation considerations, see Standard Document, Executive Employment Agreement and Practice Note, Negotiating and Drafting an Executive Employment Agreement.