Non Compete: Everything You Need to Know
A non-compete is a type of agreement that some employers require new employees to agree to before beginning work that takes effect after relationship has ended.4 min read
What Is a Non-Compete?
A non-compete is a type of agreement that some employers require new employees to agree to before beginning work that usually takes effect after the relationship has ended. An agreement can also be made at the end of a business relationship, but some form of compensation needs to be made. Usually, these agreements are requested to protect trade secrets or goodwill amongst clients. This agreement is made between two parties, where one party agrees not to compete, or join a competing organization during a time period.
The goodwill that an employer develops with clients is considered an asset, so a non-compete agreement can prevent employees from using that goodwill to compete in the future. An employer may also use a non-compete agreement to protect confidential information such as trade secrets.
In deciding whether or not to enforce an agreement, a court will look at the effect of the clause on the business and compare this to the effect the agreement has on the employee.
When it comes to a former employee's right to earn a living, courts will usually disapprove of the non-compete agreements. These types of agreements are closely looked at in the court system. It is becoming more difficult to enforce in many states.
Legal Requirements for Non-Compete Agreements
A valid non-competition agreement must protect a legitimate business interest, such as trade secrets or confidential information, and be reasonable in its scope, region, and duration. The employee must also be compensated. At the beginning of the business relationship, signing a non-compete agreement can be a condition of the job offer, but if the agreement is made at the end, or during the relationship, there must be further compensation. This could include a promotion or other benefits.
If the non-compete agreement is created to protect information or trade secrets, the length of the clause cannot be longer than the time for which it has value. The geographical area also be taken into consideration depending on each case. This is dependent on the services that the business provides, as well as the services the employee provides to the employer.
Generally, a court will not enforce a non-compete agreement that prevents an employee from working in a region where their former employer did not do business.
Information Required for a Non-Compete Agreement
In order to create your non-compete agreement, you will need the following information:
- A specified agreement effective date. This is the date that the agreement will start protecting the protected party (i.e., the employer) against the non-competing party's work as a competitor of the protected party.
- A list of names and address of the parties in the agreement.
- A statement of the reason for the non-compete agreement.
- A specified time period for the non-compete agreement.
- A specified geographical location for the non-compete agreement.
- A statement of how the non-competing party will be compensated.
- A list of individuals who will sign the agreement.
Non-Compete Versus Non-Disclosure
A non-compete contract states that you will not directly compete with the protected party for determined a length of time and within geographical limits. A non-disclosure agreement means you will not share confidential information with competitors or external individuals. This does not mean you cannot work for a competitor.
Effects of a Non-Compete
If you are asked to sign either a non-compete or non-disclosure agreement, review it closely to decide if it is reasonable to you. If it is, it will be legally binding.
Non-compete contracts have been seen amongst senior executives, but they are now being presented to employees in blue collar work. A survey done by economists showed that one in five employees were bound by non-compete clauses in 2014. This has made more work for employment lawyers, one of whom says that lawsuits in employment law have tripled since 2000. They find that workers are unaware that they've signed away their right to leave for a competitor.
It's not only blue-collar workers who are confused my non-compete clauses. Those who have gone to college or have an advanced degree only have a vague understanding of the agreements and find it difficult to negotiate.
Now, companies own more than just their employees' labor; they own their general knowledge as well. Non-solicitation and non-dealing agreements (which prevent employees from working with clients they've worked with in the past) are becoming more popular.
The results are turning out to be overwhelmingly negative. With little leverage to bargain, wages, employment, and entrepreneurship are diminished as employees cannot leave for better opportunities.
Some states are taking a stance against non-competes. California law prohibits these types of clauses, and courts look at these types of lawsuits very carefully.
If you need help crafting, fighting, or learning more about non-competes, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.