Critical Business Update—Important Change to Utah’s Employment Law

The Utah legislature has passed new legislation this year that affects agreements between business owners and their employees. The new law titled the “Post-Employment Restrictions Act” went into effect on May 10, 2016. All employment contracts must comply with this new statute.  Otherwise, employers risk having their employment contracts voided.

The purpose of Non-Compete Contracts

Many employers include provisions in their employment contracts to prevent employees from unfairly competing against them. Businesses protect their trade secrets and goodwill in the community through non-compete clauses (otherwise known as covenants not to compete).

I will illustrate this principle with a hypothetical example:

There is a new business in Utah called “Airsenders.” Airsenders has come up with a new device that permits individuals to use air currents in their home (created by an elaborate system of fans and vents) to levitate items and move them from one room to another. Airsenders have multiple patents and trade secrets for this proprietary air-pressure transportation system. Airsenders also has proprietary customer lists that they use for sales purposes.

Airsenders has spent significant time and resources to develop goodwill in the community. Several favorable magazine articles were written about the success of their products. They also sponsor several local charities to garner goodwill among the people of Utah.

Airsenders requires all employees to sign employment contracts that include non-compete clauses. In order to work at Airsenders, employees must agree that they will not engage in any household air-pressure-based goods-transportation businesses in Utah for one year after their employment terminates.

This contract provision helps to ensure that employees will not take Airsenders’s proprietary trade secrets or customer lists to competing companies. Employees cannot simply “jump ship” and walk into a competitor because this would violate the employees’ contracts. The contract provision also helps protect Airsenders from employees who might try to unfairly compete by leeching off the goodwill that Airsenders has garnered in the community.

One time their contract was put to the test. An employee, named Aang, quit his job at Airsenders to start a competing company called Breezepush. Aang started calling former Airsenders customers and telling them that because of his experience at Airsenders, he can offer the same product at a lower price. In other words, Aang was using the goodwill earned by Airsenders to unfairly compete for Airsenders’ customers. Airsenders sued for breach of contract (along with violation of patent and trade-secret laws). The Court issued an injunction against Breezepush, ordering them to cease operations. Airsenders was able to hold Aang personally responsible for breaking his contract and engaging in unfair competition.

Drafting an Enforceable Non-Compete Agreement

A Court will only enforce a non-compete clause in an employment agreement if the clause meets the requirements of Utah law. The requirements for a valid non-compete clause are as follows:

  • The non-compete clause must protect a legitimate interest. Protection of trade secrets and goodwill earned by a business are examples of legitimate interests that may be protected.
  • The clause must be reasonably limited in time, geography, and area of business. If the clause limits an employee’s activity for more than one (1) year after employment termination, then it is void.

The Airsender non-compete clause from the previous hypothetical meets this test because it protects a legitimate interest—trade secrets and goodwill earned by the company—and it is reasonably limited. It only forbids employees from engaging in household air-pressure-based goods-transportation businesses in Utah for one year after their employment terminates.

For additional information and to make sure that your employment contract is valid under Utah’s new law, contact Hepworth & Associates at 801-872-2222.