A Non-Compete Agreement is an employment contract employers use when hiring an employee to prevent the employee from working in the same industry as another party.
What is a Non-Compete Agreement?
A non-compete agreement is a legal document stipulating that one party will not compete in the same industry or geographical area as another party. This agreement is often signed when a company hires an employee.
It can also be used between companies and vendors, freelancers, and entered into after an employee has worked with the company for any time.
Generally, this agreement protects a business’s customer relationships and intellectual property. This keeps former employees or contractors from taking contacts or information they learned through the company and opening their businesses.
It also protects the company from having former employees take contacts or information and going to work for a competitor.
Non-Compete Agreements to Protect Confidentiality
There are a few reasons that a company would want to use one. One fundamental motivation is to protect the company if an employee with access to sensitive information leaves.
For example, a high-ranking employee with relationships with the firm’s most important customers could leave and possibly solicit those customers to follow.
That same employee would also have access to proprietary information, creative or intellectual property, and internal information that would pose a risk in the hands of competitors.
Part of the agreement stipulates that employees can’t divulge this sensitive information to a competing entity. In many cases, it would give a period (usually one or two years) during which the departing employee cannot work for a competitor.
The time frame ensures that time-sensitive information isn’t divulged to any competition.
How Long is a Non-Compete Agreement Good For?
A non-compete is good, as stated in the agreement. Typically, six months or less is the stated duration and is a reasonable amount of time.
In some cases, a non-compete could be enforceable for years. It depends on the needs of the company and the parties involved as to how long a non-compete agreement lasts.
When to Use a Non-Compete Agreement
This agreement goes into effect once the employee or contractor severs ties with the company. There are a few ways that a company can draw up non-compete contracts and a few scenarios in which they would be helpful.
- When a new employee is hired: A non-compete agreement is often part of the hiring package. It is only recognized legally if a value is placed on it for the employee. In other words, the employee needs to be offered some form of payment for their agreement. When the agreement is signed at the time of hiring, the offer of employment and salary is sufficient incentive to make the agreement legally binding.
- When a company finds they need the agreement due to the sensitive nature of information, an employee sees: Companies may ask employees to sign this agreement at any time. However, the employee must be compensated in some manner for this to be a legally binding contract. As a current employee already receives a salary/paycheck, the job itself isn’t sufficient. Offering a one-time monetary payment is one solution. A raise and/or promotion would also serve as adequate payment.
- When purchasing a company from a previous owner: Often, the owner of a company represents a good deal of the company’s worth. The individual’s knowledge of the industry and relationships are integral to that company’s success. When purchasing a company, it’s essential to use this agreement to ensure that the previous owner doesn’t open a new company that competes with the company you’ve purchased or takes a position in another company within the territory and time allotted in the agreement.
Why You Need a Non-Compete Agreement
Employees are the most valuable part of your company. Depending on the level and specialization of the employee, they often know your business and industry intricately. This knowledge helps them to make your company successful.
But given to a competing entity, it could be a distinct disadvantage to your organization.
Without a non-compete agreement, a key employee could leave and would likely stay in the area and the same industry. While companies can’t stop employees from moving on or working in the field, they also shouldn’t risk intellectual property or insider knowledge being used against them.
Here are some possible outcomes without this agreement in place:
- Employees could leverage their knowledge of your company to secure a high-ranking position with your direct competition: As shady as this sounds, it happens. Employees can and should look out for their own best interests. That would include looking for the highest-paid position in their industry. A solid business practice pays employees fairly for their contribution and ensures staff is satisfied with the company. This agreement would ensure that high-ranking employees couldn’t use knowledge of your company to secure employment with direct competitors.
- Employees could use the knowledge gained through your company to open their competing enterprise: Many employees may want to be their boss. While there’s nothing wrong with employees having long-term goals for their industry growth, your company can’t afford to teach people the industry to have them turn around and use that knowledge to compete with your interests directly. Without a non-compete agreement, employees could open their firm in the same area, using connections and knowledge they gained while working for your firm.
- An employee could leave and hire away key employees: Without this contract, an employee who takes a position in another company or forms their own company might also court employees from your company to leave with them. Remember, these are colleagues they have developed a relationship with, and the outcome could be disastrous to your firm.
Most Common Uses of Non-Compete Clauses
Traditionally, these agreements were created for high-ranking employees and those with specialized knowledge of your business. Companies are increasingly using them for a larger swath of their staff. Often new hires will need to sign one to secure the position.
Non-compete agreements need to be very specific in what they prohibit. A company can’t stand in the way of a former employee’s ability to earn an income – that wouldn’t be enforceable, nor should it be.
For this reason, the contract needs to specify a region and specific industry or type of position that the staff member couldn’t take up directly after leaving.
Because these agreements have become more universal for employees that are not management or higher, many jurisdictions are very careful about the wording and legality of the accords. Courts lean heavily toward the employee in these cases because it’s clear that an unfair agreement can seriously harm the employee.
This is why, when drafting one, it’s essential that you’re very specific and that all the laws are followed precisely. These agreements are an excellent way to protect business interests.
But they must be pretty drafted, so employee rights are also considered.
Specific state provisions
These agreements are not the same in different states and jurisdictions. For example, Illinois and North Carolina have particular provisions you need to be mindful of:
For instance, Illinois recently passed the Illinois Freedom to Work Act, which prohibits companies from enforcing non-compete agreements with low-wage employees.
The state of Illinois reasons these agreements were created to protect companies from theft of intellectual property and relationships, particularly to high-ranking staff members. Using the same deal with low-wage staff members imposes undue hardships on the employee.
If you had one in Chicago, it might only include companies within city limits, not the extended suburbs. The time limit on the agreement should also be reasonable – usually one-year or two-year terms.
In the state of North Carolina, the enforcement of these agreements is very particular. The court will not rewrite one to make it enforceable.
Other states will often work to rewrite the agreement to be legally binding and fair. In this state, an agreement found to be unenforceable cannot be saved, which means it’s completely void.
What Should Be Included in Your Non-Compete Agreement
An enforceable agreement needs to be drafted carefully. Agreements that are too wide geographically or restrictive without clear reasoning may not be enforced should the situation arise. Here are some things that must be considered:
- Compensation: The employee must be paid something valuable for the agreement to be legal. This might be a matter of the salary and benefits they receive when hired. If they are already employed or are working in a freelance capacity, other payment may be necessary. This could include a promotion and raise or a specific sum.
- Geographic Region: A non-compete can’t indicate that an employee can never work anywhere. The geographical region that’s restricted should be specific. If your business is local only, they should not be precluded from working in another location.
- Industry: The agreement should specify the industry, type of work, or competitors. Employees often leave to work in a different industry or a position with a company that is not competitive.
- Employee Specialization: The agreement should be specific to the employee. Employees can be an asset to another company due to their hard work and diligence. The contract should specify industry knowledge, or specialized skills the company provided them with that can’t be used elsewhere – such as a customer mailing list or intellectual property.
- Assignment Provision: If you use this contract in your business, you should include an assignment provision. If the company is sold, the employees are still bound by the non-compete to the new owners.
These are some areas that should be addressed in your agreement. It’s essential to be as specific as possible in drafting these agreements. This might include updating as employee knowledge and positions advance.