Time Limitations in Restrictive Covenants for an Arizona Employment Contract

Employers often want to preclude former employees from going to work for competitors for a period of time after they part ways. They do so by including restrictions in an employment contract that the employee must sign as a condition of employment. While time restrictions are allowed, they must be carefully drafted.

“A restriction [in an employment contract] is unreasonable and thus will not be enforced: (1) if the restraint is greater than necessary to protect the employer’s legitimate interest; or (2) if that interest is outweighed by the hardship to the employee and the likely injury to the public.”1 “A restraint’s scope is defined by its duration and geographic area.”2 “The burden is on the employer to prove the extent of its protectable interests, and if it cannot, the entire covenant will be deemed unenforceable.”3

An employment contract will often contain a “step-down” provision in the time limitation. For example, “employee shall not engage in similar work for a period of 18 months after termination or, alternatively, if a court finds 18 months to be unreasonable, then for a period of 12 months after termination or, alternatively, if a court finds 12 months to be unreasonable, then for a period of 9 months after termination or, alternatively, if a court finds 9 months to be unreasonable, then for a period of 6 months after termination.”

A step-down provision like the one above is an acceptable way to limit time restrictions to a reasonable term because Arizona courts can use the “blue pencil rule” to eliminate unreasonable provisions from an otherwise enforceable employment contract. However, courts are specifically prohibited from adding terms or rewriting provisions.4 If a step-down provision exists in an employment contract, an Arizona court can strike out the unreasonable portions and leave in what it deems to be reasonable because the parties already agreed to such a time restriction.5

However, employers cannot get cute in the agreement and just say, “whatever a court deems reasonable is what we agree to.” That is an unenforceable time limitation because there is no agreement. In Varsity Gold, Inc. v. Porzio,6 the parties had a such a clause in their employment contract so the court tried to write-in what it thought were reasonable restrictions.7 The court of appeals reversed citing to Farber’s prohibition against a trial court adding to or modifying the parties’ employment contract.8 The blue-pencil rule only allows the court to eliminate unreasonable provisions; it does not allow a court to write-in provisions it believes are reasonable.

If you have questions about whether your employment contract is enforceable, contact one of the attorneys at BWG.

1 Valley Med. Specialists v. Farber, 194 Ariz. 363, 369, ¶ 20, 982 P.2d 1277, 1283 (1999).

2 Id. at 370, ¶ 25, 982 P.2d at 1284.

3 Compass Bank v. Hartley, 430 F.Supp. 2d 973, 979 (D. Ariz. 2006).

4 Farber, 194 Ariz. at 372, ¶ 31, 982 P.2d at 1286.

5 Compass Bank, 430 F.Supp. 2d at at 980–81.

6 202 Ariz. 355, 45 P.3d 352 (App. 2002).

7 Id. at 356–57, ¶¶ 4 and 7, 45 P.3d at 353–54.

8 Id. at 358–59, ¶¶ 16–17, 45 P.2d 355–56.

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