We’ve all heard of the term non compete agreement. But what are these agreements exactly? Sometimes it seems like nobody knows.
What we do all know is that they are very common in the workplace, which makes it a good idea to find out exactly what they are, how they can affect you now and in the future, and what to do if you are given one to sign.
As with most things, the best way to get ahead in understanding non compete agreements is to prepare before you need to sign one, especially since it’s likely that you will need to several times throughout your career.
This is why we made you this handy guide all about how to navigate a non compete agreement, from start to finish.
What is a non compete agreement?
Here is a definition of a non com agreement:
“A non-compete agreement is a contract between an employee and an employer in which the employee agrees not to enter into competition with the employer during or after employment. These legal contracts prevent employees from entering into markets or professions considered to be in direct competition with the employer,” according to The Balance Careers.
These agreements are to be enforced when the working relationship ends. The purpose of a non compete agreement is to act as a sort of insurance for the employer and help protect them with regards to the employee having confidential information about them. The main point is that the employee will not be able to use their information to compete against them.
A non compete agreement is particularly helpful to employers who work in niche industries so their confidential information stays with them. This applies to both employees who begin to work for a direct (or indirect) competitor and to ones who start a business in the same field as their previous employer.
A very common issue that often comes up is when a former employee begins to recruit the company’s workers to leave alongside them.
A non compete agreement does not only apply to full-time employees; they frequently apply to consultants or independent contractors who also get to see the company’s proprietary information.
“Consultants and independent contractors who terminate their relationships with companies often are subject to noncompete clauses to avoid competition after the separation,” according to The Balance Careers.
“Employers also may seek non compete agreements to protect themselves against former employees revealing secrets or sensitive information about operations, clients, customers, formulas, pricing, strategy, salary, methods and practices, ideas, future products, or public relations and marketing plans.”
A non compete agreement can also go by the aliases noncompete, non compete clause, non compete covenant, covenant not to compete. These terms all mean the same thing.
How long is a non compete agreement valid?
A non compete agreement usually remains in effect for a specific period of time after the employment ends. Non compete agreements can only be used for realistic time periods, which need to be set in advance.
Most importantly, a non compete agreement cannot permanently (or for too long) prevent former employees of companies from moving ahead in their careers; this is not what non compete agreements are intended to do!
The terms and stipulations for non compete agreements vary widely depending on many factors and across different geographies, and it’s important to seek legal help if you have any specific questions or are feeling stuck.
Is a non compete agreement legally binding?
“There sometimes are challenges to whether non-compete agreements are legally binding. There isn’t a simple answer. It varies from case to case and can depend on state law, on how restrictive the agreement is in terms of time and the radius of the region, and on what the employer construes as competition,” explains The Balance Careers.
“Noncompete agreements usually are considered legally binding as long as they have reasonable limitations, such as clear, realistic regions where employees may or may not work, or an exact amount of time that must pass before an employee may commence work in the field again.”
Again, it’s important to check non compete agreement laws in your specific state, as they vary. For example, states like California, North Carolina and Oklahoma don’t follow these agreements at all while other states operate by determining which careers are riskier to companies, therefore naturally predisposing them to a non compete agreement.
What are the rules of non compete agreements?
Non compete agreements are intended to be fair to both employers and employees. To that end, they need to have certain information on them in order to be considered valid and legally binding.
The information they need to have includes the following:
- An effective date on which the agreement will begin to be in effect
- The reason for the agreement
- The dates on which the employee won’t be able to work in a competitive sense and which geographical locations that applies to
- How employee will be compensated in exchange for agreeing to the stipulated terms
“An example of a non-compete agreement might involve a company that is one of only two or three such companies in a market that offers a specific product or service. The company may ask salespeople to sign a non-compete agreement because they don’t want those salespeople going to a direct competitor and trying to take their client list with them,” writes The Balance Careers. “Another example might include a software company that doesn’t want its developers going to a competitor where they can share detailed knowledge about products being developed.”
One of the common mistakes with non compete agreements is that “the agreement is unenforceable because there was no consideration. One of the most common reasons that courts refuse to enforce Non-Competes is that employers make the mistake of obtaining the agreement from an already-hired employee without providing the employee with anything of value in return. Generally, such agreements are unenforceable because the employee did not receive any additional “consideration,” says law firm MacElree Harvey.
Another all too common mistake is that “the agreement is unenforceable because it restricts competition for too long. Another common reason that courts refuse to enforce a Non-Compete is that the agreement restricts the employee from competing for an unreasonably long amount of time.”
“While having a well-drafted, enforceable Non-Compete can be a source of significant value for many businesses, some are disappointed to discover that they have agreements that are unenforceable or otherwise inadequate,” the law firm writes.
It is essential for both employers and employees to understand the intricacies of a non compete agreement.
What do you do if you’re asked to sign a non compete agreement?
Approximately 28 percent to 47 percent of private-sector workers were subject to non compete agreements in 2017, according to the Economic Policy Institute. This just goes to show just how common non compete agreements really are.
“Non-competes are typically used to keep highly paid executives from jumping ship and taking the company’s secrets with them. They also are commonly used to prevent salespeople and others who work directly with customers or clients from taking those relationships with them when they leave, said employment lawyer Laurent Drogin, a founding partner with Tarter Krinsky & Drogin,” says CNN.com.
“Often the reason employers want them is a retention device. [It’s] prophylactic. If people think they have an agreement that binds them and they may get sued, if they can’t afford an attorney and need the job, they’ll sign now and worry about it later. It’s a scare tactic,” employment lawyer and founding partner with Tarter Krinsky & Drogin Laurent Drogin told CNN.
In fact, many economists assert that non compete agreements are unfair and should not be enforced as they have the power to suppress wages, reduce worker mobility, and restrict competition.
To that end, two bills were introduced in the Senate this year with the intention to ban non compete agreements for low wage employees.
“Several states have passed legislation restricting how broad the terms may be and, in some cases, also have banned employers from using them on low-wage employees,” according to the article.
“Non-competes are typically used to keep highly paid executives from jumping ship and taking the company’s secrets with them. They also are commonly used to prevent salespeople and others who work directly with customers or clients from taking those relationships with them when they leave,” Drogin told CNN.