Employment Non-Competition Covenants- What Law Applies and Why The Answer To That Question Is So Important
Many Arizona employees are often subject to non-compete agreements, or “covenants,” in which the employee agrees in advance to not compete with his or her employer for some time after leaving or being terminated by the employer. These covenants may also include an agreement that the employee will not solicit the employer’s customers for a time after the employment ends. Employers may use these agreements to keep employees employed with them and keep the valuable skills, training, and information the employer has invested in them. However, some employees use these skills to get a different and potentially better job with a competitor. When that occurs, some employees do not really understand or remember what they have previously agreed to.
Frequently an employee signs the agreement and then either quits or is fired. The employer is not happy with the employee in either event and dusts off the non-compete covenant. The question for both the employer and the employee then becomes, is the non-compete covenant enforceable? Answering that question is complex and would take more time than this article permits. For now, we will focus on the first and most basic step to take in analyzing whether or not a covenant is enforceable – what law applies?
What law applies is important because whether non-compete covenants are enforceable is determined by state laws, which vary from state to state. Some states are employer-friendly. They have laws that allow employers to write and enforce broad covenants to effectively prevent employees from earning a living in their chosen occupation for years after leaving their employment. Employees who defy those covenants can be faced with threats of a lawsuit that they often cannot afford to defend.
Other state laws are more employee-friendly. They implement judicial and public policies that employers should not overreach beyond what is reasonably necessary to protect their legitimate business interests and that employees should not be unreasonably restrained from earning a living in their chosen occupation after leaving their employment. Some states are more employee-friendly than others. California is the most employee-friendly state in the country, where all post-employment non-compete covenants are illegal and cannot be enforced at all. [i]
Arizona is probably the second most employee-friendly state in the country. In Arizona, for public policy reasons, non-compete covenants are said to be “disfavored” and are “strictly scrutinized” by our courts. They are legal and can be enforced. But an employer who wants to enforce a non-compete covenant must show that it is reasonable in all three of the following respects:
- Duration - how long the covenant restricts the employee from competing,
- Geographic scope - where the covenant restricts the employee from competing, and
- The kind of work or activity that is restrained and what the employee is prevented from doing.
Arizona law will almost always apply to Arizona employers who hire them to work in Arizona. Some large, multi-state employers may use standard employment agreements that contain what are called “choice-of-law” provisions. A choice-of-law provision is an agreement that the law of a particular state, not necessarily the state where the employee works, governs all aspects of the employment relationship, including the validity and enforceability of a non-compete covenant. A Delaware-based employer, for example, may employ someone to work in Arizona, but, force the employee to give up Arizona’s employee-friendly laws and agree to Delaware’s employer-friendly laws.
Is that legal? Well, yes and no.
In Arizona, the parties to a contract cannot agree to accomplish that which they could not accomplish under Arizona law. In the employment context, that means an employer may not enforce an employee’s agreement to apply the laws of another state if: (1) the chosen state has no substantial relationship to the parties or the employment, and there is no other reasonable basis for choosing that state; or (2) Arizona has a materially greater interest than the chosen state to apply its laws, and applying the chosen state’s laws would be contrary to the fundamental policy of this state. [ii] And so:
- If a Delaware employer employs an Arizona employee and the parties choose Florida law, which is a very employer-friendly, an Arizona court would likely find that Florida has no substantial relationship to the parties or the employment and there is no other reasonable basis for choosing Florida law, and thus apply Arizona law instead.
- If, however, a Delaware employer employs an Arizona employee and the parties choose Delaware law, it is conceivable that an Arizona court would find that Delaware has a substantial relationship to the parties or the employment, and thus apply the chosen Delaware law.
- But even if a Delaware employer employs an Arizona employee and the parties choose Delaware law, despite that substantial relationship, an Arizona court could still find that Arizona has a materially greater interest than Delaware to apply its laws and, because Delaware laws are contrary to the judicial and public policies of this state, apply Arizona law instead.
- If, on the other hand, a California employer employs an Arizona employee and the parties choose California law, there usually would be no reason for the employee to challenge that because, in general, California laws are not only not contrary to the judicial and public policies of this state, they are far more employee-friendly than the judicial and public policies of this state.
This seems more complicated than it really is. The basic principle is fairness. Arizona employment laws based on its own judicial and public policies should usually apply to Arizona employees who work in Arizona, regardless of who or where the employer is. Especially when it comes to the effect and enforcement of non-compete covenants, it is a pretty good bet that, even if the parties agree to another state’s employer-friendly laws, the judicial and public policies of this employee-friendly state will win every time.
About the Author: David N. Farren is an attorney at the Phoenix law firm of Jaburg Wilk who practices employment law, contract and business disputes, and complex commercial litigation. He can be reached at 602-248-1000 or at firstname.lastname@example.org.
This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.
[i] See Cal. Bus. & Prof. Code § 16600.
[ii] See Pathway Medical Technologies, Inc., 2011 WL 4543928 (D.Ariz. 2011); Swanson v. Image Bank, Inc., 206 Ariz. 264, 77 P.3d 439 (2003)