A non-compete agreement is a contract employers use when hiring an employee to prevent the employee from working in the same industry as another party. It can also be useful when dissolving a partnership or selling a business.
The author of a non-compete agreement must draft it according to state laws and ensure it contains reasonable provisions.
Requirements for a Non-Compete Agreement
Here are the requirements for a non-compete agreement:
- Legitimate interest: A business can’t implement a non-compete agreement just to minimize competition. Instead, it must prevent a legitimate threat to the company’s operations.
- Scope of work: A business should define the activities an employer is prohibited from performing.
- Consideration: A business must make the benefits of a non-compete agreement clear for both parties.
- Duration: A business must implement a definitive and reasonable term for the non-compete agreement.
- Geographical area: A business must clearly define the geographical area in which the other party can’t compete.
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 agreements and a few scenarios in which they would be helpful:
- Protecting confidentiality
- Hiring employees or contractors
- Dissolving a partnership
- Selling a business
Why You Need a Non-Compete Agreement
Employees are valuable components of your company. Depending on the level and specialization of the employee, they often know your business and industry intricately. This knowledge helps them 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.
- An employee 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 directly with your interests. 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.
How to Create a Non-Compete Agreement
Here’s a list of steps you can follow to create a non-compete agreement:
Step 1 – Research the Laws in Your State
Some states have more restrictive laws than others when it comes to creating non-compete agreements, so you can conduct thorough research to ensure your final agreement complies with the established laws.
Step 2 – Decide What Behavior to Ban
Think about the nature of the company and the work your employees do. Consider what behaviors or actions would threaten your company’s operations, as you may consider including these as banned activities in your non-compete agreement.
Step 3 – Choose a Geographical Area and Time Period
Select a reasonable geographical area in which you don’t want employees performing certain activities or working with other companies. You can also choose a reasonable time period to ensure your non-compete agreement has a finite end date.
Step 4 – Add a Non-Solicitation Clause
Including a non-solicitation clause in your non-compete agreement can help you ensure employees or vendors don’t seek out their former customers or coworkers.
Step 5 – Acquire Signatures
As the contract initiator, you can sign your name and collect the relevant party’s signature.
