A non-compete agreement is a written legal contract between an employer and an employee. The non-compete agreement lays out binding terms and conditions about the employee’s ability to work in the same industry and with competing organizations upon employment termination from the current employer.
Generally, the non-compete agreement states that the employee may not work for a competing firm for six months to two years following the employment end. In a recent consultation, however, the employer asked a potential employee to sign a non-compete agreement that barred his children, grandchildren, spouse and other relatives from working in the same industry for all time.
This is a non-compete agreement that goes well beyond the normal terms of a non-compete agreement and the potential employee was strongly advised to not sign the agreement.
Fortunately, he sought legal counsel before signing an agreement that put legal bounds on his children and grandchildren that barred them from working in the field. (In an egregious case like this, it is doubtful that the document would hold up in court because of its far-reaching consequences. The example is provided to demonstrate just how far some employers try to go with their non-compete agreement.)
Employers Benefit From a Non-Compete Agreement
Employers benefit from non-compete agreements because they keep a former employee from sharing industry experience, knowledge, trade secrets, client lists, potential clients, strategic plans, and other information that is confidential and proprietary to the employer with competitors.
This benefits an employer by protecting the viability of their business and their products and processes. It also protects the best interests of the remaining employees because it ensures that employment termination does not undermine their best interests.
Employees Benefit From a Non-Compete Agreement
Employees benefit from non-compete agreements because they receive something of value in return for signing the non-compete. In most cases, the item of value is the job. A promotion or raise in return for the signature also qualifies as something of value.
Current employees may also be asked to belatedly sign a non-compete agreement. This is a trickier situation since the employee already has a valued item: the job. What else can the employer offer? Turns out, sometimes, nothing, as in the following example.
In a small manufacturing company, several employees sold the company’s product out of their garages. They legally purchased the products from the company and it was a lucrative side business for them.
When their company owner belatedly asked them to sign a non-compete agreement which would have delegitimized their side sales, they both quit rather than sign the non-compete agreement. (Employers need to note that asking an employee to sign a non-compete after they are already employed is fraught with potential consequences as this employer learned when he lost two valued employees.)
They continued to sell the company’s products out of their garages and, since they never signed the employer requested non-compete agreement, they were legally able to continue.
What Else Does a Non-Compete Agreement Cover?
A non-compete may also cover additional factors such as limiting a former employee’s ability to recruit the employer’s staff to a competing enterprise. A non-compete frequently prohibits the former employee from calling on customers of the employer and prohibits the use of sales leads obtained while employed.
A non-compete may also disallow employment in a particular region of the country. A non-compete almost always prohibits the former employee from working on or developing similar products or starting a competing business without a signed agreement from the former employer.
Are Non-Compete Agreements Legally Enforceable?
The legal system favors employees in non-compete litigation. The courts interpret the employee’s right to make a living as more important than enforcing the terms of a non-compete agreement with an employer.
In some states such as California, the courts will not enforce a non-compete agreement. Other states limit the use of a non-compete agreement, so check the laws in your state or country before creating a non-compete agreement, if you want it to be legally enforceable.
Generally speaking, a non-compete agreement that is not too restrictive in terms of length of time covered and the amount of territory covered is more enforceable. As an example, the six months to two years recommended earlier is rarely seen as too restrictive.
A non-compete agreement that covers integral components of the actual job description and responsibilities is more enforceable. A non-compete agreement that is tied directly to the possession of confidential and proprietary information, which if revealed, could seriously damage the former employer’s business interests, is also more enforceable.
Finally, if the employer has provided something of value to the employee in return for signing the non-compete, such as a job, the non-compete will be more enforceable.
A non-compete agreement should offer a clause that allows an employer to sign off on or give permission to the former employee to work for a particular firm, in a particular region, to cooperatively start a competing business, and so forth.
This will be valuable to have in the agreement if you leave to start an enterprise that might be viewed as competition, but it is located ten states away and poses no competitive problems for your current employer.