Non-Compete Agreement

What is Non-Compete Agreement?

A Non-Compete Agreement is a contract signed by an employee who agrees not to compete with the employer. It includes agreeing not to work for a competitor or not to start businesses that would be considered competition.

The contract usually specifies the amount of time the agreement is enforceable. This specifies the time after the employment ends. Businesses make employees sign non-compete agreements to gain an advantage over industry competition. These contracts are also referred to as non-compete clauses, non-compete covenantsCovenantsCovenant refers to the borrower's promise to the lender, quoted on a formal debt agreement stating the former's obligations and limitations. It is a standard clause of the bond contracts and loan agreements.read more, covenants not to compete, and non-competes.

Key Takeaways
  • A non-compete agreement is a contract between an employee and employer, where the employee agrees not to compete with the businesses for an extended period after employment.
  • The contracts must clearly define how long the non-compete is effective for, the area it covers, and the information to be withheld.
  • Businesses will use non-compete agreements to protect sensitive information that should be kept away from their competition.

How do Non-Compete Agreements Work?

Non-compete agreements are usually signed at the beginning of a new employee-employer relationship and will go into effect when the relationship ends. The contract allows the employer to have specific authority over the employee’s actions, lasting a particular amount of time after the relationship ends.

Although such agreements are drawn up for the employer’s benefit, they will have to be fair and reasonable towards the employee as well. For example, the contract cannot restrain an employee from seeking employment and making a living on their own.

Reasonable Non-Compete

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The contract includes specific provisions that the employee and employer agree upon. The specifics are as follows.

  • Specifics about when the contract becomes effective are mentioned.
  • Details regarding how long the agreement is effective are specified.
  • The prohibited areas of the contract are established clearly.
  • What is considered competition is clearly defined in the contract.

For a competition contract to be enforceable, the provisions must be impartial to both sides of the agreement, the employee and employer.

Non-competes are more common in certain industries than in others. For example, news hosts may attract a particular crowd of people who enjoy listening to their media commentary. The network may then ask the employee to sign a non-compete clause to retain their talent and followers. The contact is likely to restrict the employee from signing with a competitor. The network fears that the employee might steal their followers and take them to a new network.

Non-compete agreements are common in the following industries.

  • Technology
  • Manufacturing
  • Finance
  • Corporations
  • Medical
  • And Services

Clearly, there is a wide range of industries that utilize these agreements to their advantage. They are being used in today’s competitive industrial landscape, where the stakes for intellectual property are high.

There are two different types of non-competes based on modes of employment. These contracts are therefore classified into the independent contractor and regular employee subtypes.

Non-Compete Argument -Clauses

While drafting non-competitive agreements, certain clauses or sections that clearly distinguish both party’s rights and obligations have to be included.

Non-Compete Agreement

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These clauses include:

#1 – Effective Date

The contract must state a date on which the agreement becomes effective.  It must clearly mention whether the contract is effective after the employment ends or during employment.

The clause must include specific time frames for how long the contract remains in effect and what date it will cease.

#2 – Disclosure

The disclosure section outlines the details of the agreement. It will detail what exactly the employee must refrain from disclosing, including certain company secrets or intellectual property.

The section will also allow the employer to block any employee attempts to uncover the intellectual property.  Additionally, it prevents the employee from joining a competition for the specified time.

#3 – Jurisdiction

Details pertaining to the territory in which the agreement is enforceable must be mentioned. Jurisdiction depends on the type of business.

Some industries have more jurisdiction than others. The service industry has limited jurisdiction in contrast to information technology (IT). In IT, trade secrets can be more damaging to the company.

#5 – Employee Rights

For the contract to be fair and enforceable, the employee also must benefit from it. Exceptions are added to the contract. Exceptions include seeking new employment, jobs security, etc.

Employees can get other benefits in lieu of a non-compete. Benefits include promotions, increments, transfers, etc. 

Sample Non-Compete Agreement

A sample format of a non-compete agreement includes in-depth specifics about the effective date, disclosure, jurisdiction, and employee rights. A mere example of a contract includes the following.

#1 – Effective Date

This contract, when effective on {date} will establish an agreement between {Employee Name} and {Employer name} regarding certain intellectual property of the company.

The contract intends to protect information and prevent the party from revealing trade secrets. The contract is effective for {contract length} and will end on {termination date}.

#2 – Disclosure

The employee must refrain from sharing any trade secrets or intellectual property regarding the business to any other individual that may be engaged with a similar business.

#3 – Jurisdiction

The employee agrees not to engage in activity that would violate this agreement within {jurisdiction extent}.

#4 – Employee Rights

The employee will be promoted to {title} and will receive a compensation of {amount} for entering into the agreement.

Employer                                                                                                       Employee

{signature} and {date}                                                                                    {signature} and {date}

How to Get Around a Non-Compete Agreement?

Employees may not take such a contract seriously. However, upon termination, the employee may face difficulties due to the fine print. To safeguard their interests, employees can take the following steps.

#1 – Check the State Laws

Some US states like California completely disregard any non-competes. Many others incline towards the employees safeguarding the underdog.

Checking the state laws if they enforce the contracts is an excellent place to start.

#2 – Negotiate with the Employer

Some businesses and employers will be willing to negotiate certain details of the contract. In some instances, employees will be able to sign a separate agreement in order to break the first one.

#3 – Go to Court

If employers violate the rights outlined in the agreement, employees can potentially take them to court. Many times if employees manage to prove that the agreement is placing an “undue hardship” on them, then the court will consider the contract unenforceable.

Frequently Asked Questions (FAQS)

What happens if you violate a non-compete agreement?

In most cases, upon violating this contract, the employer will launch a lawsuit against the employee. In exceptional circumstances, the court may order an employee to refrain from working for a competitor for the period of the non-compete agreement.

What is the purpose of a non-compete agreement?

Businesses make employees sign these agreements to gain an advantage over industry competition. Such clauses are more common in certain industries than in others. For example, news hosts may attract a particular crowd of people who enjoy listening to their media commentary. The network may then ask the employee to sign a clause to retain their talent and followers. The contact is likely to restrict the employee from signing with a competitor. The network fears that the employee might steal their followers and take them to a new network.

Are non-competes enforceable if fired?

Such contracts can be enforced even after being dismissed. But employees may be able to get out of it if the employer violates the contract. Also, employees can opt out of the contract if the employer sacks them for an unjust cause.

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