A non-compete agreement is a form used for preventing an employee from taking a company’s confidential information and competing against them with it, whether on their own or through a competitor. Although a notoriously difficult form to enforce, it is a worthwhile investment to ensure full and part-time employees know the information they’re learning is exclusive to the employer. The document goes into effect when an employee leaves the company, whether it is on their own terms or the result of being fired.
Definition: A business contract that restricts an employee from competing with their hiring company.
Specific to the hiring of employees, a business that holds a unique competitive advantage can go about protecting their edge by having employees sign a non-compete agreement. The organization can’t require someone to sign it (or anything, for that matter), but they can “let go” or refuse to hire someone that doesn’t agree to enter into the contract. This in itself serves as a benefit for companies, as it gives them a means of identifying current employees and/or applicants that would potentially endanger the business’ success in the near or distant future. A non-compete is also commonly used when a person or entity purchases a company. This is to prevent previous owners from using their insider knowledge to compete with the business they just sold.
An agreement is only as good as how well it upholds the employee to their written promise. As far as non-compete agreements go, there are several steps the issuing company should follow when drafting up their own, which we’ve outlined below:
An employer shouldn’t issue the non-compete as a blanket form for all employees. Doing so shows a lack of planning on behalf of the employer, and can result in a non-compete this isn’t enforced by the courts. The only employees that should be asked to sign the form are those with direct access or knowledge to the company’s trade secret(s) or competitive advantage(s).
Note on lower-income employees: Those that are low-income earners should generally be avoided when it comes to non-competes. Unless the employer has an irrefutable reason for doing so, it is generally frowned upon to prevent those that are starting out (or with minimal skills) from leaving the employer for competition.
In order for a contract to be binding, there must be consideration, which is something in return to the person that agrees to sign. For newly hired employees, the consideration would be their job. Should they not sign it, the employer can deny them the position. However, for already-existing employees, consideration doesn’t exist since they already have the job. To remedy this, the employer can provide a monetary guarantee for the employee (such as a bonus or raise), or they can guarantee the employee different job duties or a new position entirely.
Provide sufficient details in the form to cover exactly what is off-limits for the employee. The types of barred companies and positions should be specified. For example, if an employee works in sales for a computer company, the hiring entity would restrict them from bringing their clients to a direct competitor. The leads and connections the salesman made can be thought of as the intellectual property of the employer, and they have every right to protect that. On the other hand, preventing a computer technician from working as a plumber in a similar business would be considered illegitimate due to their experience/knowledge not being a threat to their previous employer.
Companies that have a brick and mortar location or who operate solely in a specific area cannot prohibit an employee from working in a similar space in an entirely new location. In other words, if the employee won’t be working for an immediate competitor (even if they offer the same services), the non-compete won’t hold up in court. Depending on the exact business’ scope, limiting the employee on a mile radius from the company’s office and/or listing specific towns and cities is appropriate.
Although later down the list, this step is one of the most important. Other than the mistake of not having consideration, a contract that doesn’t terminate for an unreasonably will be thrown out in court. According to MacElree Harvey, a duration of six (6) months will be considered reasonable for the majority of industries. Having said, the recommended timeframe will vary according to the industry and specific information the company is looking to protect. If the issuing entity can justify needing three (3) years, a court may very well enforce it up to that point.
Once all of the above steps have been completed, the document will be ready to sign. If the employer feels it’s necessary, they can have the document notarized. While entirely optional, the Notary Public proves the employee signed the form, entered into the agreement willingly, and knew what they were signing. Once signed, a copy should be provided to the parties that sign it.
An agreement is only as good as how well it upholds the employee to their written promise. As far as non-compete agreements go, there are several things one should keep in mind when drafting up their own. These include:
Don’t put too much trust in it – Securing information and retaining worthwhile employees is a never-ending endeavor. A non-compete agreement, while useful, shouldn’t be given too much weight. The company should be very selective with who they provide information to, keep a running list of who has what information, put effort into their digital security, and more.
Have a plan if they breach the contract – The employer can take several steps depending on what they deem is the severity of the employee’s breach, among other factors. When (or if) the employer will send a cease and desist, use litigation, and/or utilize dispute resolution should be pre-determined.
Step 1 – Employer & Employee Names
In the first of the two (2) fields provided, write the name of the business that is creating the agreement (the “Company”). Then, write the full name of the employee or business entity (the “Recipient”).
Step 2 – Prohibited Actions
Here, the company can specify exactly what the recipient can’t engage in after their departure from the company. At least one (1) field needs to be checked. The company can check all boxes if they so choose. If “Specific competitor(s)” is checked, the exact individual(s) or entity(ies) must be listed on the two (2) lines provided.
Step 3 – Time Effective
Establishing how long the recipient will be bound to the contract after it goes into effect is very important. In the first field, write the number of years the contract will remain in effect. Then, enter the number of months. If it’s active for 2 years (for example), write a “0” in the months field. Alternatively, if it’s only effective for six (6) months, write a “0” in the years field.
Step 4 – Option to Purchase
Because litigation is so expensive, it’s often cost-effective for employers to provide their employees with a simple “way out” of the contract should they breach it. However, this should only be selected if the information the employee could share would not do irreversible damage to the employer. Why? If the employee sees they can share information and only have to pay a penalty for sharing said info, they could see the trade secrets or other knowledge as being dispensable by their employer. If permitting the “Purchase Option”, check the first box and write the dollar ($) amount the employee would need to pay in order to void the contract. The first field is the word-for-word amount (ex: “Five-thousand”), and the second field is the numerical amount (“ex: “$5,000). If the employer does not want to include this option into the agreement, check the second box.
Step 5 – Jurisdiction
The four (4) lines shown provide the employer with a means of establishing the geographical area in which the agreement is binding. Be very descriptive here, and provide as much information as possible. Actually name the specific towns, counties, and/or areas that are off-limits. In other words, upon the agreement’s execution, the recipient cannot be employed by a direct competitor located within that area. Alternatively, the employer can specify a certain perimeter (in miles or kilometers) that is blocked-off.
Step 6 – State Law
This is for establishing the state in which the agreement falls under. Should there be a breach of contract, the laws of the state named will be interpreted, and impact the result of any court decisions. Be sure to read up on state laws prior to signing.
Step 7 – Signing
In the date area, write the day, month, and year in which the contract will go into effect. If the parties will be notarizing the document, they will need to hold off on signing until in the presence of a Notary Public. If they will not be notarizing their signatures, the parties can go ahead and sign. Both the company and the recipient will need to write:
- Their signatures (by hand or with eSign);
- Their printed name and job title; and
- The date in which they are signing the form.
Step 8 – Notarization (Optional)
If desired, the non-compete agreement can be notarized. The section on the bottom of the last page will be completed by the Notary only – do not write in any of the fields. Notary services can be found by searching for “nearby notary public” using Google Maps, or by clicking “Notarize” on the homepage. Note that a webcam is required for online notarization, as well as a one-time $25 fee.