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What Is a Non-Compete Agreement?

Non-compete agreements can help business owners protect their interests. These agreements are also called restrictive covenants or covenants not to compete. The purpose of a non-compete agreement between an employer and an employee is to make sure that the employee can't take confidential information that they learned during their employment to a competitor.

A non-compete agreement could be good for your business if employees or independent contractors gain information about your processes and techniques. When workers leave, you don't want them to take your information to a competitor who can use it to gain a competitive edge. The employee could also use the information to become your competitor if you don't have a non-compete contract.

Key Takeaways

  • Non-compete agreements keep workers from competing with their employer while they are employed or for a limited time after their job ends.
  • Non-compete agreements are not always separate documents and may be a clause in an employment contract.
  • In addition to their employees, some businesses require their independent contractors and consultants to sign non-compete agreements.
  • Enforcement of non-compete agreements varies by state, with some states refusing to enforce them.

How Non-Compete Contracts Work

Many businesses have confidential information that they protect because of its value. This information could relate to processes or techniques that are used to make a product. Privileged information or trade secrets are only valuable so long as they are unknown to competitors. When competitors have this information, they can use it to their advantage.

Employers use non-compete provisions to ensure that employees don't take the information they learned on the job to a competitor. Most non-compete provisions prohibit an employee from working for a competitor within a geographic area for a particular period.

This helps to protect an employer's information, but it limits worker mobility. For this reason, the terms must be reasonable. It's also crucial that the employer has a legitimate business interest.

How Courts View Non-Compete Agreements

If an employee signs a non-compete agreement but breaks the deal, the employer may sue the former employee. But courts look at non-compete provisions carefully to determine if the agreement is valid.

Courts look to the following factors to determine if a non-compete agreement is valid:

  • Duration: the timeframe during which the non-compete provision is effective must be reasonable
  • Geographic location: the geographic area covered by the non-compete provision must be reasonable
  • Type of work: the kind of work that the employee is prohibited from doing should be limited to the employer's specific field

Why are the courts concerned with the duration and scope of non-compete agreements? The courts recognize that business owners are interested in protecting the information that keeps them in the market. Workers also have the right to earn a living. If the non-compete provisions are too broad, the former employee may not be able to get another job in their field for several years. This could cause talented people to leave their industries to find work. The courts are balancing the interests of the employer and the employee when they assess non-compete agreements.

Validity of Non-Compete Agreements

For a contract to be valid, something of value must be exchanged. This means that both the employer and the employee must get something of value from the non-compete agreement. If signing the non-compete agreement is a condition of employment, then employment can be the thing of value that the worker receives from the contract. If the worker has already started their employment, the employer will need to provide some additional benefit.

For example, the employee could receive a raise or a bonus. If the courts find that a non-compete provision is not valid, then they might not enforce the agreement at all. The courts might make changes to the agreement instead.

Suppose that an individual signs a non-compete agreement as a condition of employment with a software company. The employer is based in and only does business in Memphis. The non-compete agreement states that the employee can't work in the software industry in any state for six years after their employment ends. One year after the employee leaves the company, he takes a job at a software company in North Carolina. The employer sues the former employee for violation of the non-compete agreement. The court may view the duration and geographic scope of the non-compete provision as too broad.

In a case like this, the court may not enforce the non-compete agreement at all. But the court could narrow the duration and scope of the non-compete provision to make it reasonable.

How State Laws Affect Employment Agreements

Laws on non-compete agreements vary from state to state. In some states, like North Dakota, non-compete agreements are not enforceable. California takes an even stronger stance against non-compete agreements. In California, an employer can be sued for requiring employees to sign a non-compete agreement.

Some states only allow non-compete agreements if they meet specific standards. It is essential to know the laws in your state on non-compete agreements.

High-Level Employees and Low-Level Employees

Consider the type of information that different types of workers gain throughout their employment. Senior or high-level employees are most likely to learn confidential business practices, techniques, and processes. For this reason, it could make more sense to have a non-compete agreement with a higher-level employee than a lower-level employee.

When a court assesses a legitimate business interest, they might consider what type of information the employee was likely to gain from their employment. If the employee's duties don't give them access to confidential information, it may be hard to show a legitimate business interest.

Non-Compete Agreements and Non-Disclosure Agreements

You might be wondering if a non-compete agreement and a non-disclosure agreement are the same. Business owners use both types of agreements to protect their interests, but there are differences.

A non-compete agreement prohibits a former employee from competing with the employer. A non-disclosure agreement prohibits the employee from sharing confidential information like customer lists or a trade secret. A non-disclosure agreement doesn't affect worker mobility. This means that an employee who only signs a non-disclosure agreement may be free to work for a competitor.

It may be easier to enforce a non-disclosure agreement than a non-compete agreement. This is because non-disclosure agreements don't limit the employee's job mobility. There is less concern, with a non-disclosure agreement, that the employee will be harmed. For this reason, it could be a good idea to use a non-disclosure agreement instead of a non-compete agreement in some cases.

Related Resources

Feeling Unsure About Non-Compete Agreements? Contact a Local Attorney

There are many ways for business owners to protect their information. You may want to think about the best way for you to go about protecting your business.

If you're unsure if a non-compete agreement is for you, don't hesitate to reach out for help. A skilled employment attorney could assess your situation and provide guidance. Consult an attorney in your area today.

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