What Is a Non-Compete Agreement?

What Is a Non-Compete Agreement?

What Is a Non-Compete Agreement?

A non-compete agreement is a contract that is enforced between an employer and an employee, in which both parties agree that the employee is not to go into direct competition with their current employer. This could be during employment, or after the employee has left the business .

These types of contracts are usually put into play when a working relationship has ended, and the business wants to prohibit their staff from working for a competing business.

This could also relate to contacts and intel the employee has obtained over the years. The business will want to ensure no information is leaked or client list retrieved.

In some cases, businesses may require their departing employees to sign a non-compete agreement if they’re setting up their own company within the same field. This is to prevent the employee from taking other workers or clients with them.

Common Industries That Use Non-Compete Agreements

Markets that tend to use non-compete agreements can be small or large in capacity and can vary from car sales, law firms and medical providers to small hair salons and beauty stores.

Both small and large companies can benefit from this legal document to ensure their industry secrets, clients and workforce are safe.

For example:

A physician has left a particular medical practice and the practice wants to ensure the physician does not take any medical-related breakthroughs, medicines or vendors with them when they set up on their own. The agreement will ensure the practice is covered.

In some cases, an employee can also be blocked from working for a competing company even if the new role would not involve the exposure of trade secrets. This would just be due to company protocol to ensure full disclosure in any circumstance.

Please note: a non-compete agreement should have both the employer’s and employee’s best interests in mind. Adding a time clause into the contract can benefit the employee as they will be able to plan for future roles.

Another example of where a non-compete agreement might come into play is at a financial institution with a high-profile client list. The business would not want to part with this list if a key employee decides to leave.

Here is an example scenario:

Dominic works for a top tech company and has a large list of high-profile businesses to whom he provides technology services. He decides to leave to set up his own tech firm but, before he does, the company he currently works for asks him to sign a non-compete agreement to protect its client list. They have arranged for the agreement to end after 12 months, so Dominic does not have too long to wait and does not leave the business on bad terms.

Do I Have to Sign a Non-Compete Agreement if My Employer Requests It?

A quick answer to this question is 'no', you do not have to sign the non-compete agreement if it does not suit your circumstances, or you do not feel comfortable doing so.

However, refusing to sign a company’s non-compete agreement could stop a potential new role in its tracks – it could be the only thing preventing you from being hired .

Or, if you are already in the job and your current employer requests that you sign a non-compete agreement, it could cause bad relations in the workplace and result in you losing your job.

This all depends on your employer’s discretion as the protocol will vary from business to business and state to state.

For example:

You are interviewing for a new job at a [law firm](/content/industry/law) and all that is left to do is dot the 'i's' and cross the 't's'. Your new company has sent you a non-compete agreement to sign before you start, which is a mandatory part of the onboarding process. The company has stated that if you do not sign the contract, the role cannot proceed.

If you find yourself in this situation, you will need to take the time to think about the following:

  • The future of your employment. Do you think you will want to start up on your own within the next five years?

  • The contract terms. Read the terms of the contract thoroughly before you sign it. Do you think the time period is fair? Ask any questions that come to mind before you decide.

  • Get some advice. It is fair for the company to allow you time to understand the contract and what it means for your work life, both current and future.

The legalities of denying you a job if you decide not to sign the agreement are decided on a case-by-case basis and may differ depending on your state’s jurisdiction. It can also depend on the proposed contract.

If you are not sure, we recommend seeking legal advice.

Can You Get Out of a Non-Compete Agreement if You’ve Already Signed It?

If you have already signed a non-compete agreement and have decided you would like the contract to be re-written or voided completely, the process to be followed differs depending on the state in which the new job is located.

The courts will take into consideration several different points:

  • Courts will look at the period of the agreement and whether it is a fair time frame for both parties. If the courts deem it too long, this could result in a re-write.

  • The location covered by the contract will also be looked at to decide if it is too large. Again, this could result in the contract being re-written.

  • In some states, courts might enforce a substantial payout to the employee in return for signing the agreement.

  • Some states only enforce non-compete agreements if they deem them fair regarding time, location and any other factors.

You could also discuss this at your employer’s discretion to see if there is a way to proceed with the agreement that will suit both parties without legal support.

What Is a Non-Compete Agreement?
What Is a Non-Compete Agreement?

What Must a Non-Compete Agreement Contain?

Non-compete agreements vary depending on the industry. However, they share certain common elements.

Protectable Interest

Your employer might have an extensive list of competitors they do not want you to work for. This could be because of trade secrets, client lists or any other factor the employer deems necessary. This is the company’s protectable interest.

However, if you want to switch your career to a completely different field, this should be acceptable. Proof from your current employer may be required.

For example:

You are currently employed at an accountancy firm and you had to sign a non-compete agreement when you started. However, you have decided to leave the firm and become a software engineer for a company mentioned in the contract. Your non-compete agreement should not affect such a change in career.

Location

Some non-compete agreements include certain locations where the employee can seek employment in the same industry.

This could be different states, coasts and countries.

Geography is dependent on the type of business and on what the employer feels is a sufficient enough distance not to have an impact on the business.

Time

In every non-compete agreement, there will be a time clause advising how long the employee must wait before seeking a new role in the same field.

Most agreements run anywhere from two to five years. Anything over five years might be deemed excessive so do seek advice if this is the case.

Some businesses might have an extremely specific list of competitors they do not want their employees working for. This could be due to the nature of the role and the discretion of the company.

For example:

You are employed at a state television station and you want to work at a competing network that is specified on your current employer’s list of competitors. This will mean you cannot work at the competing station for the amount of time stated in the non-compete agreement.

Again, this is the company’s protectable interest. As mentioned previously, each company is different, and some clauses can be re-written if deemed necessary.

Most contracts will be airtight and written carefully and concisely enough to be understandable and fair to the employee. If you feel the contract features any contradictions or is not clear enough, you can seek legal help to contest it.

What Are the Pros and Cons of Non-Compete Agreements?

It may seem that there are a lot more pros for the employer than the worker. Although this can be true in some cases, there can be positives for both parties.

Pros

  • Protectable interest – A non-compete agreement can help to protect the company from the leakage of business secrets to competitors and, in some cases, ensure a client list is safe.

  • Training and recruitment costs – A non-compete agreement will help avoid a company losing employees that they have taken the time and cost to employ and train up, only for them to use these skills elsewhere.

  • Compensation – Some companies may provide their employees with additional pay for signing the agreement. This is not a bargaining tool but it shows the worker that their employers value their know-how and expertise. It can also incentivize longer terms of work and reduce staff turnover.

  • Employer loyalty – The agreement can demonstrate an employer’s loyalty to their staff as the contract shows the business wants to retain valuable members of staff.

Cons

  • Putting off top talent – A company may lose out on top talent if they require new hires to sign a non-compete agreement before starting. Some workers might prefer to refuse the job if they must sign an agreement, thus leaving the company without top talent.

  • Time and legalities – As with most legal documents, the process of piecing everything together can take time, require legal advice and cost money for the company. It is not a quick process and everything in the agreement needs to be clear and concise and follow proper legal protocol.

  • Settlement in court – Some agreements can end up in court. As mentioned earlier, sometimes an employee will try to contest the agreement, deeming it unfair and unsatisfactory which could lead to court time.

  • Unemployment – In some cases, a worker may be left unemployed for a time if they are prevented from finding work in the same field. If this is the case, the courts will consider this.

What to Bear in Mind if Asked to Sign a Non-Compete Agreement

If you are about to start employment at a business that has asked you to sign a non-compete agreement, you need to think about all the factors in the contract:

  • Think about why you have been asked to sign the contract.

  • Consider how long the contract is for. It is hard to predict the future but if the length of the contract does not suit you, there may be room for negotiation or, as previously stated, the possibility of compensation.

  • Do you want to work for a company that asks you to sign this type of agreement? In some industries, it is common to sign a non-compete agreement; however, smaller businesses are increasingly putting them into play, which might not work for you and your profession.

  • Read, read and read again. It is important that you thoroughly read through the agreement before signing. Make sure you understand what is being asked of you.

Is a Non-Compete Agreement Necessary?

Speak to a legal professional or the state if you are unsure if the agreement is necessary. You could potentially negotiate a different agreement that suits both parties, although this would be at the discretion of your employer.

If you do not deem the non-compete agreement a necessity, it might be worth asking a lawyer where you stand when it comes to the hiring process.

If you are a business and want to put a non-compete agreement in motion, you will need to ensure your employees’ best interests are met as well as those of the business.

Difference Between Non-Compete and Non-Disclosure Agreements

A non-disclosure agreement does not stop an employee from working for a competing company. However, it can prevent the worker from disclosing any trade secrets, insider information and information about new products coming to market.

Some businesses might prefer to put a non-disclosure agreement in place instead of a non-compete agreement.

For example:

You work for a record label and want to move to a competing label. Your current employer is ok with you seeking employment with a competitor but wants to ensure their client list and any trade (and celebrity) secrets are not leaked. They would ask you to sign a non-disclosure agreement instead of a non-compete contract.

Final Thoughts

To clarify, a non-compete agreement is a contract an employer enforces to prevent an employee from working for a competing business or setting up a competing business.

This could be for a designated amount of time that the employer deems necessary to ensure the contract is fair to both the business and employee.

The agreement will be put in place when the current working relationship finishes.

A non-compete agreement should not be too confining or damaging to the worker.

Remember to read through all contracts thoroughly before signing anything and seek advice if needed. Check with a legal team or explore what your state rules are regarding these types of agreements.


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