Among other things, Texas is known for its free market approach to employees. However, despite being an employment-at-will and right-to-work state, Texas law recognizes and enforces employee covenants not to compete if they meet certain requirements.
Here are five crucial things businesses and executives should know about Texas non-competition law.
In many states, the law governing non-competition covenants is based in a body of court decisions that define when, how, and to what extent, noncompete agreements are enforceable. In Texas, there’s a statute from 1989—the Covenants Not to Compete Act–that provides the basic framework Texas state and federal courts use to resolve contractual disputes that arise in specific cases.
The Act is a specific exception to the general prohibition under Texas law of “every contract, combination, or conspiracy in restraint of trade or commerce.”
The Act provides that a noncompete covenant must “be ancillary to or part of an otherwise enforceable agreement.” While some states require an agreement supporting a noncompete to contain specific job-related business terms – for example, a minimum duration of employment, salary and benefits, detailed descriptions of the employee’s and employer’s duties and obligations, a right to terminate the employee only for cause, or severance pay – Texas law, in contrast, has traditionally allowed employers to impose noncompetes on employees even when the employer’s contractual commitments to the employee are minimal.
Court decisions in Texas have even held that noncompetes are permissible in the context of an at-will employment relationship. Written commitments from employers that have been deemed sufficient to support a Texas non-competition covenant have included:
Even an implied promise from an employer can support a noncompete. Texas courts have held, for example, that if an employee’s duties by their nature involve access to confidential information or require specialized training, the underlying employment agreement that includes the restrictive covenant does not need to recite such facts to meet the statutory requirement.
The legal concept of consideration is one of the elements that make an agreement enforceable. Each party to a contract must promise to give something of value to the other to create a binding contract. In many states, an employee cannot be bound to a noncompete covenant unless the employer is providing significant consideration to the employee at the time the covenant is agreed to – such as, the initial hiring of the employee, a promotion, or a salary increase.
Under Texas law, the consideration requirements are much more lenient. Texas courts have upheld non-competition covenants signed by employees well after their initial hiring, and have not required an accompanying milestone such as a promotion or raise. As mentioned earlier, even the promise of future training or future access to confidential or proprietary information has been held to be sufficient so long as the training or information has been delivered by the time the employer seeks to enforce the covenant.
Of course, to increase the likelihood that a noncompete covenant will be enforced, the employment lawyers at Sheehy Ware & Pappas advise business clients to obtain a signed covenant in connection with a significant event in the employee’s employment, such as hiring, promotion, or significant salary increase.
The Act provides that a non-competition is valid in Texas if “it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest” of the employer.
Although enforcing a non-competition covenant in Texas is highly fact-sensitive and each case is different, there are some general guidelines about reasonableness that we can glean from the court decisions and our representation of businesses and senior management employees:
The Act provides that if a non-competition covenant’s underlying agreement is otherwise enforceable, but the scope of the covenant is unreasonable—meaning it is broader than necessary to protect the goodwill or other business interest of the employer—the court can modify the scope of the covenant (“reform” the noncompete in the words of the statute) to qualify as reasonable under Texas law. If the covenant is reformed: