Non Compete Contracts: Everything You Need to Know
Non-compete contracts protect businesses that share ideas and procedures with its employees and independent contractors to prevent them from helping the competition. 3 min read
What are Non-Compete Contracts?
Non-compete contracts protect businesses that share ideas and procedures with its employees and independent contractors to prevent them from helping the competition. These agreements typically restrict employees from being employed by competitors (or starting their own businesses to compete) for a stated amount of time or within a geographic area. This does not mean that the employee cannot work for a competitor, only that they cannot use proprietary information to help competitor out.
Advantages of Non-Compete Contracts
1. Non-compete contracts protect an employer's secrets when employees move on to other ventures.
2. Employees are disincentivized from starting a competing organization that replicates what their employer does.
Disadvantages of Non Compete Contracts
1. Non-compete contracts often don't stand up in court because of their unfair limitations on how the former worker can earn a living.
Frequently Asked Questions About Non Compete Contracts
Is a non-compete agreement a bad thing?
A non-compete agreement is not necessarily bad for you or the company that requires it. However, you do need to be cautious when deciding if you will sign it or not since a poorly written non-compete can have negative effects on your career or business. Do your due diligence on the agreement and consult a lawyer if you have questions.
A company offered me a different agreement, is it still a non-compete?
It could be, as non compete agreements are often called by other names including:
- Non-Compete Agreement
- Non-Compete Clause (NCC)
- Covenant Not to Compete (CNC).
When should I use a non-compete agreement?
You will want to use a non-compete agreement if:
- You are trying to prevent a former or current employee with privileged knowledge of your operations from joining your competitors.
- A consultant or business partner is ending their contract, and you want to stop them from taking privileged information to another competitor.
- A business partnership between two or more parties ends.
How can you know if a non-compete agreement will work?
There are several conditions that must be present for a non-compete to be enforceable. These conditions include:
- Consideration - the agreement must be reviewed and signed by all parties involved at the time the partnership and the agreement goes into effect. It cannot be enacted retroactively unless the involved parties agree to it as a condition of signing the agreement.
- Legitimate Interests - the agreement must protect a legitimate business interest. If the interests of the business are considered to be non-specific, invalid, or unprotectable, the agreement cannot be enforced.
- Reasonable Scope - the agreement must have reasonable terms, specifically in terms of location, overall scope, and time. For example, a non-compete agreement must have a reasonable time limit, so an agreement that is permanent or indefinite will likely not be enforceable.
What is a valid consideration?
Consideration focuses on compensation for the parties involved in signing the agreement. To have valid consideration, the employee must receive something of appropriate value for signing and adhering to the agreement. That means that employees that are offered jobs or payment for signing the agreement received valid consideration and the agreement becomes enforceable.
Can a current employee sign a non-compete?
Yes, a non-compete agreement can be signed at any time. However, the consideration changes. An employee must be compensated for signing an agreement, and the ability to keep their job is not a valid consideration. Some other form of compensation must be provided for the consideration and agreement to be valid.
How to Write Non-Compete Contracts
1. Start with the non-compete contract's effective date.
2. List the names and addresses of the company and individuals involved in the agreement.
3. Clearly state why the non-compete contract is necessary.
- This often includes what happens to intellectual property and knowledge when employees leave the company.
4. Detail how long the non-compete contract will be in effect.
- You cannot expect a former employee to never work in the industry again. Make sure to include a reasonable time frame in which the agreement can be enforced.
5. Include a geographic area for the non-compete agreement, if necessary.
6. Identify how you plan to compensate the non-competing party.
- The only way to make this agreement enforceable is to pay the non-competing party.
7. Clarify if the former employee can contact the business' customers or hiring its employees if this is a necessary part of your agreement.
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