Creating an Enforceable Noncompete Agreement
Created by FindLaw's team of legal writers and editors | Last reviewed December 12, 2016
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A noncompete agreement can help an employer from losing trade secrets, employees and other valuable assets to competitors. With the increasing job mobility in today's workforce, it is no wonder that employers are becoming more concerned with training employees and their trade secrets.
Because of this concern, many companies are requiring their employees to sign noncompete agreements along with their employment contracts. These documents can, if found to be valid, prohibit a former employee from working for a direct competitor for a fixed period of time after leaving the company.
Noncompete Agreements Protect Your Business
Noncompete agreements are contracts that are entered into by employees when they start their employment with a company. If your employees regularly use your business's trade secrets, you would obviously want to prevent this employee from bringing this information to a competitor if the employee leaves your company either through voluntary departure or termination. Well known trade secrets include the Coca-Cola formula and the Kentucky Fried Chicken blend of herbs and spices.
Noncompete Agreements in California
California is one state that has decided to stop employers from using noncompete agreements. This is because California saw what an open marketplace can do for innovation and the speed of business development. Silicon Valley saw one of the fastest growing industries in history, and many scholars have attributed this speed to the absence of noncompete agreements. Employers in California must use other techniques, such as nondisclosure agreements, to attempt to prevent the dissemination of their business information.
Creating an Enforceable Noncompete Agreement
Use common sense when writing the terms of a noncompete agreement. The law places a high value on a person's right to choose how he earns a living and will be very skeptical of any document that prohibits an employee from choosing alternative employment.
- Good Business Reasons
Make sure that you have a good business reason to make your employees sign a noncompete agreement. Employment law frowns on noncompete agreements that simply punish employees who leave a company. In most situations, noncompete agreements are in place to protect trade secrets and other vital, confidential business information. If only certain employees have access to your trade secrets, then only make those employees sign noncompete agreements.
- What's in it for the Employee?
One of the basics of contract law is that there must be some benefit to both sides of a contract in order for the contract to be valid. In the case of a noncompete agreement, normally the benefit for the employee is a job offer. In this situation, the employee gets a job offer in exchange for signing the noncompete agreement. However, the situation gets more difficult when you want a pre-existing employee to sign a noncompete agreement. There, the employee must receive something in addition to his job in order to be held to the noncompete agreement. Generally, employers normally offer a pay raise or a promotion in exchange for signing the agreement.
- Be Reasonable.
For a noncompete agreement to be valid and enforceable, it must be reasonable. This means that the agreement cannot extend its bounds too far in terms of the:
- Length of time the agreement will run for after employment ends;
- Geographic area that the former employee is prohibited from working in, or
- Types of businesses that the former employee is prevented from working in.
Courts generally will focus on how long the agreement is set to run for after employment ends. Although there is no set rule, courts generally like to see agreements that run for six months to two years after employment ends. Any longer than this, courts may rule that the noncompete agreement is unreasonable and invalid.
In addition, if a noncompete agreement covers too great of a geographic area, or if the agreement prevents a former employee from working in an unrelated field, then the agreement may be voided. For example, if a noncompete agreement barred a former employee from working west of the Mississippi River, a court will look at this more closely. In addition, if a former paper company employee is prohibited from working for a coal mining company, a court may find this invalidates the entire agreement.
Getting Legal Help With Your Noncompete Agreement
Be reasonable when drafting a noncompete agreement. Courts will likely favor employees in most situations, as a company may be able to handle a financial blow better than an employee would. Contact an employment law attorney today to help you write an enforceable noncompete agreement.
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