A non-compete agreement is described as a contract between an employee and their employer that prevents the latter from participating in ventures considered to be in direct competition with their employer.
Participation could be in terms of sharing sensitive information about clients/customers, operations, formulas, strategy, salary, pricing, ideas, or public relations and marketing plans. This is information that employees will often have access to so as to effectively do their job in a company/organization if success is to be realized. A non-compete agreement can be effected on current or previous employees. It is legally binding and can be effective for a specified period of time or indefinite.
Alternate Names that are used to refer to a non-compete agreement include:
- Non-compete clause
- Non-compete covenant
- Covenant not to compete
The primary purpose of a non-compete agreement is to bar employees from sharing sensitive information with your competitors, which might be detrimental to your company’s sales and strategies. Therefore, a non-compete agreement can be used when;
Hiring new employees
The success of a company will often be attributed to the competitive advantage they have over their competitors. This advantage could be linked to the company knowing something other competitors don’t. Therefore, it is in the company’s best interests that this information is protected and kept within the company; one effective way of ensuring this is by having new employees sign a non-compete agreement. Once they sign, information about the secret to your company’s success can be shared freely for the benefit of the company. Note that job applicants can refuse to sign the agreement; however, as an employer, you have the right to deny employment.
Requesting from current employees
Sometimes a company may need to offer its already existing employees a non-compete agreement. For example, if they discover a new formula or product. Alternatively, if a company that started small without employees signing a non-compete expands to new heights and information about its operations becomes critical to protect. Issuing a non-compete agreement to current employees can be more complicated than with new employees, and as a result, an incentive or ultimatum/condition such as termination of employment, if they do not sign, might be necessary.
Types of Non-Compete Agreement
There are different types of non-compete agreements. They vary from one situation to the other. It is important to understand the different types so that once the need to use one arises, one might select one that best suits their needs.
- Independent contractor: A non-compete agreement made between a company and another party (i.e individual, company, contractor) who is not an employee of the company but has agreed to work with or for the company while withholding sensitive information.
- Employee non-compete agreement: An agreement made between a company and its employee(s) as a term of employment that protects the employer/company by preventing employee(s) from learning trade secrets and sharing them with other businesses or using them to start up competitive businesses.
- Release of non-compete agreement: Alternatively known as a release of liability, a release of non-compete agreement permits individuals/employees in a non-compete agreement to break away from the restraint of working in a specified industry.
- Confidentiality or non-disclosure: This type of non-compete agreement inhibits individuals from sharing confidential information, trade secrets or proprietorship information, and company-specific details.
- Non-solicitation of employees: It is used to prevent employees who are leaving to work for a new company from luring their former employer’s workers(past or present) into their new place of work or a competitor.
- Non-solicitation of customers: This agreement prevents individuals from working with or selling to customers they previously interacted with within their former employment.
- Non-compete: Employers use a non-compete agreement to prevent employees from working for the employer’s competitors or starting a business that is in direct competition with the employer.
Crafting a Non-Compete Agreement
A non-compete agreement will often come up during the hiring and firing process if a company feels that there are some aspects about how they operate that need to be protected from their competitors. In order to develop an effective and fair non-compete agreement, you need to ensure that you capture everything. It will often involve some research. Consider the following factors while doing so;
The first item to include is the date of the non-compete agreement. This is the date when the agreement was written.
This section should identify the involved parties (employer/company and employee/recipient). The information included should be;
- The company name- the official name of the company recognized by the state.
- Recipient’s name- the legal name of the employee
- Parties must read the remaining paragraph- Additional information such as the industry the company is associated with and the job title of the employee can be included for clarity.
Lookup the laws
The first thing to do is do some research on the applicable state laws and get to know the limits. Such laws include laws on trade secrets and Non-compete laws in the company’s state of operation.
The employer should research the competitors within the locality or indirect competition and decide which ones are more appropriate to bar their employees from. This should include specific sectors. Remember, the agreement should not be vague; the employee should be able to understand what is required of them for the document to stand in court.
The next step is outlining what specifically the employee will not be permitted to do. This section declares the employer’s terms and the duration which they shall be applicable. Limitations could be in terms of;
- Business Practices: The capacity which the employee cannot work for a competing company, for example, consultant, owner, technician, etc. This can include services, operations, formulas, strategies that they are not allowed to share.
- Clients/Customers: This outlines that the employee should not directly or indirectly engage with clients they interacted with during their tenure with the company for the benefit of a third party.
- General Competitor(s): Outlines the line of business the employer does not want the employee to engage with. It should be specific, for example, with a certain product or service.
- Specific Competitor(s): The employer lists companies or individuals they do not wish the employee to work for or have business relations with.
- Employees: The employer states their position regarding how the employee should engage with other employees of the company (former or current) and could limit hiring, partnering, working with, etc.
The next step is to state how long the employer wishes to effect the non-compete agreement. This section is, in most cases, governed by state laws. More than five years is considered excessive. Therefore, a duration of 1-2 years is recommended.
No soliciting clause
This is where the company decides if they want to include a soliciting clause. Soliciting is the recruitment of former employees of your employer or working with his or her customers. As it is expected that some employees will have access to the contact information of clients, a no soliciting clause becomes important. This clause prevents the employee from pursuing your company’s employees and clients.
If the company plans to make an offer to the employee to void the agreement by paying a certain amount (purchase option) or not, it should be indicated at this point. If this is an option, the amount should be declared.
Jurisdiction is the geographical area within which the employee is not permitted to undertake the actions previously highlighted in the agreement. It should come after the purchase option. The geographical area should be limited to the company’s/business’ trade-area/areas where the company has significant market share and presence.
Avoid limiting the employee from areas that have very minimal impact on your company’s operations.
Titled sections and subsections
The next step should be to include other pertinent information or sections regarding the agreement.
This could be in terms of;
- Confidential Information
- Permitted Disclosure
- Consultants and Employees Bound
- Return of Materials
- Choice of Law – Enter the state
- Entire Agreement
Write up the agreement
Once the employer has established the terms of the non-compete agreement, one can proceed to write the agreement. One can opt to write it from scratch or use a non-compete template and include the appropriate details.
Reviewed by a legal professional
The next step is having a lawyer or legal counsel go through your non-compete agreement. They can help advise on what to add or omit and if it meets the applicable laws. Remember, an agreement that protects is desired, not one that could end up in litigation.
Present to the employee
After the company’s legal representative has Okayed it, it can be presented to the employee for review. The employee(s) should be given adequate time to go through it as well as consult their lawyers. Any alterations from the employee can be negotiated.
Sign and date
Signing is the final step of writing a non-compete agreement. Signatures validate the agreement and are proof that both parties have read and agreed to the terms in the contract. Details to be incorporated in this section are;
- Company: The hiring representative’s signature, name, title, and date of signature.
- Recipient: The employee’s signature, name, and date of signing.
To improve its binding nature, it can be witnessed or signed in the presence of a notary public. Each party should be given a copy of the signed non-compete agreement to keep it safe.
Download Free Templates
Here are free and customized templates to download:
Things to Avoid in a Non-Compete Agreement
It is important for a non-compete agreement to be fair and take both parties’ (employer and employee) interests into consideration. As much as protecting your company’s interests is the primary objective, you should aim too strict agreements that can force employees to get out of the arrangement. Sometimes due to restrictions conveyed through the agreement, employees can choose to negotiate the terms or take legal action. These restrictions could be in the form of;
Unreasonable length of time
In most cases, a duration exceeding 5 years is termed unreasonable. Employers should try to keep the duration sensible and avoid long periods. Should the employee object to the terms through legal action, long durations can be deemed unfair by a court and, consequently, render the non-compete agreement invalid, which would see the employee relieved of their obligations to the agreement at the employer’s cost.
Unreasonable geographical requirements
If the employer limits the employee even in regions their company does not operate in, for example, restricting the employee from working for competitors countrywide, yet their former company/employer is a local company, the condition can be deemed unreasonable. If such terms are offered, the employee has the legal right to pursue litigation which would be at the loss of the employer, in legal fees and releasing the employee from the contractual obligations
Unreasonable professions identified
Agreements that inhibit the employee from professions that are unrelated to the employer’s line of business are seen as unreasonable. This is because there would not be a direct link between the profession and the success of the company, meaning whatever the employee knows in relation to that profession is legally not the company’s intellectual property. Meaning they cannot restrict him or her from using it for his or her benefit, or that of a competitor.
Remember: Employers should avoid being overly broad in their scope. Overly broad scopes can compromise the validity of a non-compete agreement in a court of law.
Undue hardship for the employee
Non-compete agreements that put an employee in a compromising position, financially or professionally, that would have been avoided if the agreement was not in effect can prompt employees to want to get out of the arrangement. To put this into perception, we can take a situation where the employee cannot secure employment at any other company reducing their financial capabilities immensely.
Discriminatory in nature
Discriminatory non-compete agreements can be alleged. This can be if it only limits employees of a specified demographic, for example, race, age, sex, ethnicity, etc. therefore, it must be avoided in the agreement.
Non-compete agreements that were entered due to coercion, deceit, or without the employee knowing understanding its terms can be challenged in court. Also, if the agreement was not validly executed, for example, an employee being promised of its termination at a later date and the employer fails to abide by this.
Violating a Non-Compete Agreement
As earlier mentioned, a non-agreement is legally binding, meaning there are legal ramifications of violating the agreement to both parties.
For an employee, there are several consequences that might befall them. One is legal action; the employer is entitled to sue employees who violate their non-compete agreements. The court may decide that the employer be compensated if they can prove that the employee’s violation harmed their business and caused damage. Alternatively, the court might force the employee to agree to an injunction that forces the employee to leave their position if they are already employed by a competitor. Most employment contracts dictate that employees declare any non-compete agreements applicably; therefore, if an employee fails to do so and violates the agreement, it might cost them their job, disciplinary measures, or legal action.
Employers can violate a non-agreement if they fail to meet the agreed obligations, such as not compensating an employee, failing to award benefits, etc. Violating employers are likely to face legal action. Also, violating the agreement relieves the employee from legal obligations agreed on in the agreement, which might be costly for the business. If the case is presented in court, employers are considered responsible for all legal fees incurred by both parties.
Legality of a Non-Compete
As earlier stated, a non-compete agreement is legally binding. However, the legality and rationale of its requirements and terms vary from one state to another. This is because non-compete agreements are governed by state and NOT federal laws.
Not all states recognize non-compete agreements. Examples of such states are California, North Dakota, and Oklahoma. States with laws in place that guide non-compete agreements are listed below:
- AL – Section 8-1-190
- AZ – No State Statute except § 23-494
- AR – § 4-75-101
- CA – Sections 16600-16607
- CO – § 8-2-113
- CT – C.G.S. 31–50a – C.G.S. 31–50b
- FL – § 542.335
- GA – Ga. Code Ann. §13-8-50
- HI – § 480-2
- ID – Idaho Code §§ 44-2701 and §§2704
- LA – RS 23:921
- MI – § 445.774a
- MO – § 431.202.1
- MT – 28-2-703, 28-2-704, and 28-2-705
- NV – NRS 613.200
- NH – § 275:70
- NC – § 75-4
- ND – § 9-08-06
- OH – § 1313.02
- OK – Oklahoma Statute Title 15, §219A
- OR – § 653.295
- SD – § 53-9-8
- TX – § 15.50-52
- WI – § 103.465
Pros and Cons of a Non-Compete
A non-compete agreement has its benefits, but that does not come without some disadvantages. These merits and demerits are as follows;
Some of the pros of having a non-compete agreement for your employees include;
- Protects a company’s trade secrets– With a non-compete agreement, a company can protect its sensitive information from being shared with its competitors.
- May incentivize an employer to provide costly training- A non-compete agreement is motivating to employers who wish to train their employees with special or advanced skills as they are assured they will not be shared with their competitors.
Non-compete agreement-related cons include;
- May reduce turnover– The limiting nature of a non-compete agreement is a bit off-putting to employees who desire to further their careers and change jobs, leaving less motivated employees to work for the company.
Reasonable Protections and Interests
For a non-compete agreement to be enforceable by law, the restrictions brought forward should be reasonable and necessary. Below are examples of such interests.
- If the non-compete agreement prevents the employee from taking advantage of any customer or supplier relationships cultivated during their tenure with the employer.
- If it protects confidential and proprietary information acquired by the employee during their employment.
- If it restricts the employee from using any special skills or training gained from or at the expense of the employer
Frequently Asked Questions
How enforceable is a non-compete agreement?
Non-compete agreements are difficult to enforce as they are very restrictive and can interfere with an employee’s means of livelihood. State laws will often dictate how enforceable a non-compete agreement is because, in a state like California, non-compete agreements are illegal unless an employer is selling a business. Other states will limit the trade secrets rather than work descriptions.
Do non-competes hold up in court?
Yes. If both parties agreed to the terms outlined in the agreement by signing, it is considered to be a legally binding document and can be referenced or used as evidence in court. However, the agreement must be within reasonable terms.
What is a standard non-compete agreement?
An agreement between an employer and employee that restricts the employee from engaging in business or employment transactions with the employer’s competitors.
Does a non-compete agreement need to be notarized?
No. There is no common law dictating that it has to be notarized. However, both parties have to sign the agreement.
Is a non-compete agreement enforceable if I am unable to work anywhere because of it?
If this is the case, it means the agreement scope is probably too broad, and you are allowed to challenge its enforceability in a court of law. Alternatively, the scope can be renegotiated to an enforceable scope.
Is my non-compete agreement enforceable if I signed it after starting my employment?
Yes. The point at which the agreement was signed does not affect a non-compete agreement’s enforceability. If you sign after starting employment, continued employment is not guaranteed but should be a consideration as well as any other promise made by the employer such as promotion, raise or change in responsibilities.