Non-Competition Agreements: Overview
Some small business owners wonder if non-competition agreements are a good idea. Having an employee agree not to compete with a current employer before taking a new job seems reasonable.
These agreements are problematic. Many courts will not enforce non-compete agreements. Some states have banned them entirely. Before making this part of your hiring package, get legal advice and review these frequently asked questions.
- What is a non-competition agreement?
- What laws affect non-competition agreements?
- Do states enforce non-competition agreements?
- What goes into an enforceable non-competition agreement?
- What methods can employers use to protect confidential information?
- Legal advice about non-competition agreements
What Is a Non-Competition Agreement?
A non-competition agreement is an agreement between an employer and an employee. It's sometimes called a non-compete contract or NCA. It says the employee will not work for competing businesses or open a similar company for a certain period of time or within a specific geographic distance after the worker leaves.
Employers use NCAs to protect sensitive information and trade secrets. In some businesses, NCAs prevent former employees from taking clients if they move to another firm.
What Laws Affect Non-Competition Agreements?
In 2024, the Federal Trade Commission (FTC) will vote on a proposed rule to ban all non-competition clauses as unfair business practices. Until then, only state laws affect the use of NCAs.
Non-compete agreements or non-compete clauses in employment contracts are not illegal. Most courts will not enforce them if an employer sues a former employee to enforce them. Courts view NCAs as "restraint of trade." Some see them as against public policy since they prevent workers from freely moving between employers.
Do States Enforce Non-Competition Agreements?
Some states no longer enforce any non-competition agreements. California, Minnesota, North Dakota, Oklahoma, and Washington, D.C., will not enforce NCAs. Nine other states (Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington) allow NCAs but restrict their use to employees earning more than a specific salary.
Most states that enforce NCAs have strict limits on duration and scope. Courts are only willing to enforce NCAs if the employer genuinely needs to protect confidential or proprietary information.
What Goes Into an Enforceable Non-Competition Agreement?
In jurisdictions that will enforce an NCA, the courts look at several factors to decide whether it is valid. Courts look to see if the NCA is:
- Protecting a legitimate business interest. The agreement should clearly state what the company is trying to protect. For instance, technology companies are protecting their intellectual property.
- Limited in scope. Prohibitions on geographic areas or other companies must be reasonable. They can't restrict employees' ability to work in a similar industry.
- Limited in duration. Although there is no set time an NCA can last, most courts will not enforce NCAs longer than a year.
- Supported by valid consideration. If the NCA is not part of the employment agreement, the employee must get valid consideration for signing the agreement. The NCA is a contract, and continued employment is not enough consideration to sign the NCA.
What Methods Can Employers Use To Protect Confidential Information?
Besides the use of non-competes, employers have other ways of protecting themselves. These are generally less restrictive than NCAs, and the courts look more favorably on them.
- Non-disclosure agreements. Also called NDAs, these agreements restrict the information, not the person. NDAs help protect proprietary information and trade secrets.
- Non-solicitation agreements. These prevent former employees from trying to contact the company's existing clients. Businesses have a relationship with their clients known as "goodwill." Suppose an employee or independent contractor leaves a company and tries to set up a new business, coaxing customers away from the old firm. In that case, they are interfering with that goodwill. A non-solicitation agreement protects the company's business relationships and client lists.
- Restrictive covenants. These are more often seen in lease agreements. Small business owners may ask a property owner to limit the types of businesses in a mall or shopping center. An employment contract can restrict employees' use of sensitive information after they leave work.
Legal Advice About Non-Competition Agreements
Business owners can protect their proprietary information. The courts usually err on the rights of workers to seek gainful employment. If you want trade secrets and goodwill protection, speak with an employment law attorney.
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