WHAT IS A NON-COMPETE AGREEMENT? All You Need To Know

Non Compete Agreement

There is no disputing that there is a lot of misunderstanding about this form of contract, whether you call it a non-compete agreement or a covenant not to compete. What exactly are they? What are the implications for employers and employees? And, more importantly, are they even enforceable?
So, before you engage in a non-compete agreement — as an employer or as an employee — there are a few things you should be aware of. More information about non-compete agreements is provided below, as well as a free non-compete agreement template that you may download.

What is a Non-Compete Agreement?

A non-compete agreement is a legal agreement between an employer and an employee under which the employee agrees not to engage in any work activities that are in conflict with or compete with their primary job. Non-compete agreements are used by companies to ensure that their employees do not engage in business activities that may reduce the company’s market share.

Noncompete Agreement Components

Each noncompete agreement should address three critical components, notwithstanding the fact that each is drafted differently for each company.

  • Duration: Long-term noncompete agreements are rarely upheld in court. Typical agreements are for two years or less, with six months to a year being the most prevalent. They may also include a severance option in the event that the employee is terminated.
  • Scope: The scope of this provision must be specific in terms of the restricted work and specific services.
  • Geography: The location of the company’s operations is a valid assumption. Noncompete agreements may include a mile radius surrounding the office address.

Non-compete agreements can also include information about direct competition and damages.

  • Competitors: The employer must identify its competitors. It is not required to specify each one explicitly, but it must define the types of firms and industries in which employees are not permitted to work.
  • Damages: This clause specifies the penalties that the employer is entitled to if an employee violates the agreement.

When are Non-Compete Agreements Legally Binding?

When it comes to the enforcement of non-compete agreements, almost every state takes a slightly different approach. In fact, some jurisdictions consider non-compete agreements to be too restrictive of competition, which means they are only enforceable in limited instances or not at all.

However, in places where non-compete agreements are permitted, numerous elements are frequently considered by courts when assessing whether a specific non-compete is enforceable, including:

  • Is the agreement required to protect the legitimate business interests of an employer, such as confidential business information?
  • Is there an acceptable time limit in the non-compete agreement?
  • Is the non-compete agreement geographically limited (city, county, area, etc.)?
  • Is the non-compete agreement supported by “consideration,” which means the employee receives something in exchange for agreeing not to work for a competitor, such as a new job, increased pay, or stock options?

One thing to keep in mind is that just because you live in a state that allows non-compete agreements does not ensure that every non-compete will be enforced. Indeed, failure to meet any of the aforementioned requirements may be enough to invalidate a non-compete agreement, even in jurisdictions where they are frequently enforced.

Noncompete agreements are not enforced at all in a few states. Noncompete agreements, for example, are invalid in North Dakota and Oklahoma. California has taken things a step further: Noncompete agreements are not only unenforceable but employers who require employees to sign them can be sued even if the company never attempts to enforce the agreement.

Employees may be unaware that these agreements cannot be enforced, according to California. By requiring employees to sign them nevertheless, the employer effectively scares employees into believing they would be sued for competing when the contract cannot be enforced.

Employers who engage in this practice may be sued for unfair competition because they acquire an unfair advantage over enterprises that follow the law.
If your state prohibits companies from requiring employees to sign noncompete agreements, you should notify your employer immediately – and refuse to sign the agreement.

What Types of Corporate Interests Can Non-Compete Agreements Safeguard?

One of the most essential criteria courts consider when establishing the validity of a non-compete agreement is whether it protects the employer’s legitimate business interests. If not, there is no reason to prevent the person from competing against a previous employer.
Among the most frequent lawful business interests are, but are not limited to:

  • Secrets of the trade
  • Business or professional knowledge that must remain confidential
  • Relationships between the company and certain consumers and clients, either existing or prospective
  • Specialized Training

The Pros and Cons of Non-Compete Agreements

Pros

  • Keep trade secrets safe: Employees departing for a competitor and exchanging private knowledge can be protected by these agreements. Having said that, the agreements must be fair to both the employee signing the agreement and the employer issuing it.
  • Inspire more creativity: Non-compete agreements can prevent ideas and information from spreading, prompting competitors to develop in order to stay competitive.
  • Used For Employee Match-making: A non-compete agreement may be used to connect companies with employees who intend to stay put in a position or value being trusted with vital knowledge.
  • Reduce employee turnover or exit: Non-compete agreements can reduce employee turnover since they limit other employment options. Furthermore, organizations with non-competes may need to provide training and education to their staff in order for them to continue inventing, which benefits their careers and market worth.

Cons

  • Weaken employee bargaining power: When under a non-compete agreement, employees are banned from seeking a better-paying position or bargaining for increased compensation or benefits.
  • The waiting period for new employment might be lengthy: Non-compete wait periods may prevent departing employees from finding meaningful employment in their fields of competence. Employees who sign non-compete agreements may leave their field entirely if finding a new job becomes too difficult after signing one.
  • A few societal advantages: Non-compete agreements often benefit only the firm and do not provide many social advantages to employees.
  • Employees lacking trade secrets can be restricted: According to the Office of Economic Policy at the United States Department of the Treasury, less than half of employees covered by non-compete agreements have trade secrets. Unfortunately, this means that more than half of workers subject to non-compete agreements are unnecessarily confined by these restrictions, further limiting their bargaining power.

How Long Do Most Non-compete Agreements Last?

Non-compete periods are typically six months to one year long, but they can be extended. Long-term non-compete agreements, on the other hand, are difficult for corporations to legally enforce. Some jurisdictions refuse to enforce these agreements, and others refuse to recognize them as lawful.

How Can I Get Out of a Non-Compete Agreement?

Here are five strategies for getting out of a non-compete agreement.

  • Establish that your employer is in breach of contract. If your non-compete agreement is buried in an employment contract, ensure that other aspects of the deal were upheld. This could include insurance requirements, owed compensation, or any other component of your employment agreement. If your employer violated the contract, you may also be released from your duties.
  • Demonstrate that there is no genuine interest in enforcing the non-compete agreement. There is no reason to require a non-compete agreement as a condition of employment unless you have access to trade secrets, sensitive information, specialized training, or other proprietary material.
  • Demonstrate that the agreement is not for a reasonable period of time. It is up to the court to establish what constitutes a reasonable period of time for a non-compete agreement. If your employer includes an unreasonable time period, it may not be upheld. It will be determined by where you live, your work, and your industry.
  • Demonstrate that the confidential information you had access to was not unique. If your organization is acting to protect customer lists or sales leads, they must come from non-public sources. If you can demonstrate that the knowledge you have is widely available, your non-compete agreement may not be enforced.
  • Demonstrate that public health and safety would be jeopardized. A court will not enforce a non-compete agreement for public health and safety positions that are understaffed and in need of labor. Employees in specialist health and science professions may fall into this category.

How Can I Avoid a Non-Compete Agreement?

If you sign a non-compete agreement and then violate it, you could be sued. Non-compete agreements are enforced (or not) by state law, which varies.

Is It Possible to Enforce a Non-compete Agreement?

The legality and enforcement of non-compete agreements vary by state. Beck Reed Riden LLP conducted a survey of states and created a summary of their positions on non-compete agreements, protected interests, criteria, and exemptions.

Non-compete Agreement Template

While it is advisable for businesses to hire a lawyer to write a noncompete agreement according to their needs, various sample templates are accessible online for inspection. Noncompete agreement templates are available online at the following websites:

  • Nolo
  • Business in a Box
  • Rocket Lawyer
  • Society for Human Resource Management

If you’re on a tight budget, this could be a decent middle ground between hiring an attorney and using a template. Just be mindful of the services’ restrictions.

How to Make a Non-Compete Agreement

#1. Research your competition.

Determine which types of firms are direct competitors to yours. Competitors are companies who provide similar goods or services to you, sometimes in the same geographic area. You must be aware of any potential conflicts of interest among your staff.

#2. Draft the agreement.

You can draft your own agreement or use one of our non-compete agreement samples. In either case, your agreement should be tailored to the circumstances of your company.

When creating legal documents, it is critical to get the opinion of a lawyer or legal representative. Request that a lawyer reviews your contract for any potential omissions or faults. You want your non-compete form to be watertight, so don’t assume it is because you utilized a free non-compete agreement template.

#4. Give your employee the agreement.

The employee should be given the opportunity to ask questions at this point. The greatest thing you can do is go over the document with them.

#5. Sign and date the agreement if everyone is happy.

Both parties can sign the non-compete agreement if everyone believes the provisions are fair. You should preserve a copy for your records and provide your employee with a copy for his or her records.
Here is an example of a non-compete agreement template.

Non-Compete Agreement Template:

Non-Compete Agreement

This Non-Compete Agreement is entered into between ________ (Employee) and ________ (Company Name) on the __ day of ____ in the year 20 ____. [Company Name] is located at [Address] and is represented by [name of representative] in this agreement.

WHEREAS, the Company is in the business of [describe type of business].

WHEREAS, the Employee and the Employer have entered into a formal Employment agreement where the Employee will perform duties related to their position as a [Job Title]; and

WHEREAS, the Employee agrees to the restrictions described herein as binding.

THEREFORE, the Employer and the Employee agree to the following terms:

NON-COMPETITION. For the entire duration of this agreement, and for [length of time] after the Employer’s relationship with the Employee has been terminated for any reason, the Employee will not work as an employee, officer, director, partner, consultant, agent, owner or engage in any other capacity with a competing company. This means that Employee must not perform any work for [describe type of company] in [geographic area].

EMPLOYEE ACKNOWLEDGEMENTS. The Employee acknowledges that they have been provided with the opportunity to negotiate this agreement, have had the opportunity to seek legal counsel before signing this agreement, and that the restrictions imposed are fair and necessary for the Company’s business interests. Finally, the Employee agrees that these restrictions are reasonable and do not constitute a threat to their livelihood.

APPLICABLE LAW. This agreement and its interpretation shall be governed by the laws of [state, province, or territory].

IN WITNESS WHEREOF, both parties agree to these terms and give their consent and authority to this agreement below.

Employee Signature ____________ Date ____________ Employer Representative Signature ______________ Date

Noncompete Agreement Template

Noncompete Agreement Alternatives

A non-solicitation agreement is an alternative to a non-compete agreement.
A nondisclosure (or secrecy) agreement is another alternative that is more enforceable than non-compete agreements. Depending on the business and the information or products being safeguarded, you can use nonsolicitation and nondisclosure agreements in tandem to create a deterrent that makes an employee think twice.

Conclusion

Signing non-compete agreements may not always be in your best interests, but it is usually in your potential employer’s best interests. Before signing one, consult with an employment attorney for clarification on your state’s rules and consider the likelihood that you will have problems obtaining work in your field if you leave your position.
Not all states enforce non-compete agreements, but some do, so it’s worth knowing how a non-compete agreement will play out if you quit your work or violate your agreement ahead of time.

References

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