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.
Using a template is significantly easier if you need to create a noncompete agreement. Download yours below and learn everything you need about what should be included.
Non-Compete Agreements By State
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
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.
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.
- 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 contract 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.
To protect confidentiality
There are a few reasons that a company would want to use one. One important reason 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. The time frame ensures that time-sensitive information isn’t divulged to any competition. In many cases, it would give a period (usually one or two years) during which the departing employee cannot work for a competitor.
An alternative to non-compete agreements is to include a non-compete clause in a legally-binding employment contract or confidentiality agreement form.
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.
- 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.
Most Common Uses of Non-Compete Clauses
Traditionally, non-compete 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 such agreements have become more universal for employees that are not management or higher, many jurisdictions are very careful about the wording and legality of agreements. Courts lean heavily toward the employee in these cases because it’s clear that an unfair deal can seriously harm the employee.
These agreements are an excellent way to protect an employer’s legitimate business interests. But they must be pretty drafted, so employee rights are also considered. This is why, when drafting one, it’s essential that you’re very specific and that all the laws are followed precisely.
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 agreement 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 non-compete agreements should also be reasonable – usually one-year or two-year terms.
In North Carolina, the enforcement of non-compete 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
To enforce non-compete agreements, they need to be drafted carefully. Agreements that are too wide geographically or restrictive without clear reasoning may not be implemented 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. If your business is local only, they should not be precluded from working in another location. The geographical region that’s restricted should be specific.
- 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 agreement 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.
Sample Non-Compete Agreement
The sample below shows what a typical non-compete agreement looks like:
Frequently Asked Questions
Are Non-Compete Agreements Enforceable?
Non-competes can be enforceable, but it depends on several factors, such as the state the non-compete is in, if there’s a protectable interest, and if the clause is fair. Non-competes are governed by state law, and each state has restrictions on using non-competes. Non-competes could be unenforceable for many reasons, including if they are too restrictive, vague, or go against state laws.
What States Are Non-Compete Agreements Not Enforceable?
The states where non-compete agreements are not enforceable are California, North Dakota, and Oklahoma. Non-compete arrangements are nearly entirely banned in these three states and the District of Columbia.
There are some exceptions where they may not be void such as in California; if the owner of a business is selling the entire business or is selling the goodwill in the business, the parties to the sale can use a non-compete agreement to prevent the seller from competing with the business in the geographic area that the business conducts or has conducted.
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.
How To Get Out Of A Non-Compete Agreement
If you’ve found yourself signed into a non-compete agreement or clause and feel unfairly restricted, there are a few ways you may be able to get out of the agreement:
- Prove your employer is in breach of contract – If you’re signed into a non-compete clause or agreement as part of a contract, such as an employment contract, ensure the other aspects of the contract are met. If there’s a breach of contract, you may be able to terminate the agreement and, therefore, the non-compete clause.
- Prove the agreement is for an unreasonable duration – If you’re locked into a non-compete clause or agreement for what feels like an unreasonable length of time, you may be able to get it overturned in court, depending on what state you live in, your job, and the industry.
- Prove the agreement is unreasonable in the geographical distance restricted – If the non-compete is too broad or too far-reaching in limiting where you can engage in the same or similar business activities, you may be able to have the non-compete voided in court.
- Prove there’s no genuine interest to enforce – Many non-compete agreements and clauses set out to protect legitimate business interests. Still, a lot of the time, many employers overreach these interests and enforce non-competes on low-level employees unfairly. It could be terminated if the non-compete protects trade secrets, specialized training, or other proprietary material.
- Prove that trade secrets aren’t secrets – If the employer is trying to protect are already readily available to the public or anyone in the industry you’re working in, your non-compete may not be enforceable.
- Prove that public health or safety would not be served – This only applies to specialized scientific and health areas such as doctors and nurses. If there’s a shortage of workers in a specific area that affects public health, you may be able to override the non-compete even if it’s completely fair and legal.