Employee's Duty of Loyalty to Employer: Duty Not to Compete with a Current Employer

There is no such thing as a free lunch. This holds especially true in the world of employment, where employees are often expected to demonstrate loyalty and commitment to their employers in exchange for a paycheck —apart from their daily job responsibilities. Some commentators have posited that this duty of loyalty hinders employees’ professional growth potential while others argue that it is necessary to protect information vital to a business’s success.

One area where this tension plays out is in an employee’s duties to their employer. Under New York common law, an employee's duty of loyalty to their employer is well-established and encompasses their duty not to compete with their employer’s business. “Competing” with one’s current employer can include starting or operating a business that provides the same or similar services as one’s current employer,[1] simultaneously working for a different company that is a direct competitor to one’s original employer,[2] or accepting outside employment that interferes with one’s duties to one’s original employer.[3]

The rationale behind this duty is that many employees have access to confidential information and trade secrets that are vital to their employer's success. If an employee were to use this information to benefit their own business, or that of a competitor, it could cause significant harm to their current employer.

However, the common law duty not to compete is not absolute. For example, it will not prevent an employee from seeking employment opportunities from competitors or from preparing to work for a competitor after the original employment relationship terminates, as long as this preparation does not include using an employer’s time, facilities, or confidential information.[4]

Despite these common law exceptions, many employers have employees sign noncompete agreements. A noncompete agreement may be one section of an employment contract or a standalone contract that an employee signs before or after the employment relationship begins. By signing a noncompete agreement, the employee promises that—for a certain period time after the employment relationship ends—they will not engage in business activities that are in direct competition with their former employer. It is also common for noncompete agreements to have geographical limitations—in other words, they bar former employees from working for competitors that are within a certain radius of their former employment.

New York courts have held that a noncompete agreement is enforceable to the extent that:

1. It is necessary to protect the employer’s legitimate interests;
2. It does not impose an undue hardship on the employee;
3. It does not harm the public; and
4. It is reasonable in time and geographic scope.

Examples of an employer’s legitimate interest may include protecting its trade secrets and confidential information as well as preventing employees from taking specialized skills they gained on the job to a competitor. On the other hand, New York courts have struck down these types of promises if the geographic scope is, for example, “the entire world” and the employer did not prove that such scope would be necessary to protect its legitimate interests.[5]

Critics of the duty not to compete argue that it is often used to stifle competition and prevent employees from advancing their careers. They argue that the clause is often included in employment contracts to prevent employees from leaving and taking their skills and knowledge to a competitor, rather than to protect trade secrets or confidential information. In recent years, there has even been a push to reform or eliminate the duty not to compete altogether. The Federal Trade Commission (FTC) has even proposed a rule that, if passed, would amount to an effective ban on the use of noncompete agreements.[6]

Ultimately, the duty not to compete remains a contentious issue in the world of employment. While it may be necessary to protect trade secrets and confidential information, it can also limit the ability of employees to pursue new opportunities and advance their careers. As with many areas of the law, finding the right balance between competing interests is key. At KI Legal, our Labor and Employment Division specializes in the intricacies of the employer-employee relationship. Business owners, operational managers, and human resources professionals are encouraged to consult with our team of attorneys at KI Legal as we are well-versed in employment law and compliance matters. If you are an employer and you feel that one or more of your employees is in breach of their duty of loyalty, do not hesitate to contact our labor & employment attorneys by calling (212) 404-8644 or emailing info@kilegal.com.

This information is the most up-to-date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.

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