The Top 5 Things to Consider When Drafting a Non-Compete Clause
is completed The Fairness of Post-Transaction Agreements in Business Transactions3 min read
When it comes to big business decisions, one of the most important considerations is ensuring a fair and amicable agreement after the transaction. The best way to protect both parties involved is through a non-compete clause, also known as a covenant not to compete. It is a provision in an employment agreement whereby an employee agrees not to compete with the employer for a period of time after the termination of their employment. A covenant not to compete can help protect an employer’s legitimate business interests, while keeping employees from getting an unfair advantage when negotiating with potential employers. While these clauses can be highly beneficial for employers, they must be drafted carefully to ensure that they meet legal requirements. If you are based in Chicago and are looking for counsel that understand local regulations, here are the top five things to consider when drafting a non-compete clause.
1. Statutory Requirements
The first thing to consider when drafting a non-compete clause is whether it will meet the statutory requirements of your local jurisdiction. Understanding the relevant statutes can be a complicated task, and may require the assistance of a knowledgeable attorney familiar with local regulations. In Chicago, for example, some of the statutory requirements for a non-compete clause include that it be reasonable in scope and duration, and that it not prevent the employee from earning a living. Additionally, there may be restrictions on how the clause might be enforced, so consulting with legal counsel can be beneficial to ensure compliance.
2. Geographical Restrictions
The second thing to consider when drafting a non-compete clause is geographical restrictions. This is an important consideration, as the ability to restrict an employee’s ability to compete in different geographic areas can be an important part of protecting a company’s interests. When it comes to geographical restrictions, it is important to consider the scope of the restriction and how it might be enforced. It might be beneficial to consult with legal counsel who are knowledgeable about local and federal regulations to ensure that the geographical restrictions are reasonable and in compliance with the law.
3. Relevant Industry
When drafting a non-compete clause, another important consideration is the relevant industry. A non-compete clause should be tailored to a particular industry, and should include specific restrictions that prevent the employee from exploiting their knowledge or expertise gained in the position they were formerly employed in. Additionally, industry specific restrictions should specify the type of activities that should not be engaged in after the termination of the employee’s employment.
4. Reasonable Time Period
When crafting a non-compete clause, it is important to consider a reasonable time period for the clause to remain in effect. Courts typically look at two factors when determining the reasonableness of a non-competition period: the length of the period and the scope of the activities that are prohibited. A period of one to two years is usually reasonable, and any duration greater than this must include some justification for the length. Additionally, courts will consider any specifics associated with the industry or the particular position held by the employee when determining the reasonableness of the restriction.
5. Considerations for Terminated Employees
Finally, when crafting a non-compete clause, it is important to consider what provisions should be included with regards to terminated employees. In most cases, courts will not enforce a non-compete clause against an employee that has been terminated without cause, although they will also generally not allow the employee to exploit the knowledge or relationships they had gained while employed. As such, it can be beneficial to include provisions in the clause that clarify what should happen in the event of a termination without cause, as well as the circumstances under which the employee may be prevented from using the knowledge or connections gained during their employment.
Drafting a non-compete clause can be a complex matter, and it is important to consider all of the relevant factors before putting one in place. If you are based in Chicago, it is important to ensure that the clause will meet the requirements of your local jurisdiction, including understanding the relevant geographical restrictions, relevant industry, and reasonable time period. Additionally, it is important to consider what provisions should be included with regards to terminated employees. Working with an experienced attorney who understands local regulations and can help you craft a clause that meets your business needs and is in compliance with the law can make all the difference.