Non-Compete Clause: Everything You Need to Know
A non-compete clause prohibits any employee from using the skills and knowledge used or gained at a workplace for a set period of time after their employment.5 min read
2. Why Is a Non-Compete Clause Important?
3. Do Not Use a Non-Compete Clause If...
4. Use a Non-Compete Clause If...
6. When You Use a Non-Compete Clause vs. When You Don't
7. Common Mistakes
8. Frequently Asked Questions
9. Steps to Create
Updated July 10, 2020:
Non-Compete Clause: What Is It?
A non-compete clause prohibits any employee from using the skills and knowledge used or gained at your workplace for a set period of time after their employment, either by working for a competitor or by recruiting business from current clients. It is written into an employee's contract when they sign on with your company or when they leave your company.
Many employers add non-compete clauses to employee contracts. These clauses protect businesses but are controversial. Also, they may not be enforceable in all places.
Non-compete clauses are traditional at jobs where workers are highly skilled or do very specialized work. However, more and more businesses include non-compete clauses in contracts, even if employees' tasks are not technical. That is because the idea is to protect the business and any trade secrets or confidential information from being shared with competitors in the industry should employees switch jobs.
Why Is a Non-Compete Clause Important?
A non-compete clause protects your business. If you don't have a non-compete clause, you may see other companies, owned or staffed by previous employees, taking your business, using certain techniques or even having knowledge of confidential information.
Confidential information, sensitive business information, or a trade secret can be entitled to protection from the non-compete clause if the employer can show it took reasonable measures to keep the information secret and that information gives the employer a competitive advantage in the marketplace.
Goodwill for customer relations developed by an employer is considered an asset so employers can also use a non-competition agreement to prevent a former employee from using this goodwill and competing.
Do Not Use a Non-Compete Clause If...
Do not use a non-compete clause if you don't have legal standing in your area. Some states or cities have laws in place that make non-compete clauses unenforceable, like California, except in certain cases.
Use a Non-Compete Clause If...
Use a non-compete clause if your company is in a highly competitive business, and you're worried about employees taking the specialized knowledge they gain elsewhere. This is particularly relevant for start-up employers, if worried former employees will form their own competitive business. There are downsides, however, as employees can feel disadvantaged from the outset.
Typical situations where companies would use a non-compete clause
An employer just hired a new employee
An employer and employee are ending the relationship
A company and a consultant are ending the relationship
Two business parties are ending the relationship
You will typically need employees to sign a contract with a non-compete clause before they leave your company. Non-compete clauses typically last for a few months to a year after the employee leaves your company.
When You Use a Non-Compete Clause vs. When You Don't
If you use a non-compete clause, your employees will usually stay away from jobs where they would risk competing with your business to avoid breaking the contract. If they do not, you may be able to stop them by taking them to court for breaking it. However, if your former employee does not cave under legal pressure, you may find that the non-compete clause is very often legally unenforceable in many jurisdictions.
If you use a non-compete clause, be aware that word may get out to future employees. Some people may not apply to work at your company for fear it will harm their ultimate interests You may also suffer bad press, because some people believe non-compete clauses unfairly take advantage of employees. This is especially the case if your non-compete clause is written broadly, or without appropriate contractual requirements.
If you don't have employees sign a non-compete clause, they may use the skills they gained elsewhere. They may even start a new business to compete with yours. However, there may also be no change in the quality or quantity of your business' competition.
Many businesses think non-compete clauses are universally enforceable. In many areas (such as Oklahoma), they aren't, or they may only apply under certain conditions. Check your state's laws for how they handle non-compete clauses and if any special conditions apply.
Non-compete clauses are usually struck down because they are not limited or reasonable. For example, if the clause is limited in time as to a year or two, that is more likely to be upheld than a clause without limitation. Geographic limitations can also be used to ensure the clause will be upheld. The key is reasonableness - non-competes must balance the needs of the employer to protect its business versus the needs of the employee to find good work in the future.
Frequently Asked Questions
What makes a non-compete clause enforceable?
While exact guidelines vary in different places, in general, a non-compete clause needs three things:
- The span of time and area as well as scope of services, roles, and skills in which an employee may not compete with you should be reasonable.
- You must give the employee "consideration"—a sum of money, benefits or something else—to compensate them.
- The clause must protect a legitimate business interest of yours.
What is considered valid “consideration”?
Non-competition agreements generally must be supported by valid consideration which is usually something of value in exchange for the promise to not compete. If the employee signs the agreement before employment, the employment will be considered enough value to make the non-compete valid. However, if the employee signs the agreement after starting employment, the promise of continued employment is not valid consideration. The employee must receive something else in exchange for value such as a promotion, lump sum payment of cash, multiple payments at an interval, or additional benefit not part of the original employment agreement.
What should the clause include?
It should include:
- The date it takes effect
- The names and addresses of all parties
- The reason for the agreement, or what the agreement will protect
- The reason for the non-compete agreement
- The agreement's duration
- The geographic area in which it will take effect
- How the employee will be compensated for signing the agreement, also known as “consideration”
- What individuals are signing
These points may be negotiable by either party before signing.
What else may it include?
Other common lines in the contract include:
- The employee may not pull away from your customers to a new business. The time period during which this clause is enforceable should be included.
- They may not hire or contact your employees. The time period during which this clause is enforceable should be included.
- They may not share confidential information. The time period during which this clause is enforceable should be included.
- The clause may include the specific companies the employee may not work for or deal with.
- The clause may mention the terms of a person's departure as a condition. For instance, it may not take effect if an employee is fired.
Steps to Create
To create a non-compete clause, you will need to write a contract for your employees to sign. You will need to keep a copy of the signed contract on every person's file. It is a good idea to publicize the agreement in your employee handbook.
You do not need witnesses to the signing nor do the signatures need to be notarized.
If you're thinking about including a non-compete clause in the contracts you give your employees, you can post your legal need on UpCounsel's marketplace. UpCounsel only 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 of 14 years of experience including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.