A non-compete agreement is a contract signed by a new employee which states that the employee will not engage in direct competition with his current employer should he/she choose to terminate the current job. It is designed to protect the employer from the employee using the knowledge and or skills learned in his current position to directly compete with the employer through another company offering the same service or product. Non-compete agreements can thus protect the integrity and success of a business. However, used incorrectly, these agreements can open businesses to lengthy and costly litigation.
Specifics Of A Non-Compete Agreement It is only natural to protect your company from being exploited by employees wishing to gain an unfair advantage by draining your company of its uniqueness and competitive edge or from employees sharing sensitive or confidential information to competitors. In the eyes of employees, however, non-compete agreements are perceived negatively for being overreaching and overly restrictive.
Before drafting a non-compete agreement, it is important to understand some key issues about this topic:
- Consideration
Using the “independent consideration” doctrine, a non-compete clause cannot be imposed on an employee, even if they agree to it, unless the employee receives something of value in return for. This consideration would include employment. However, for current employees, signing a non-compete in exchange for continued employment may not be enough. Other benefits like an increase in salary, bonus or promotion may be required. The issue of consideration differs from state to state. - Geographic Coverage
Agreements with no geographic limitations may be deemed unreasonable or too widespread or unlimited in scope, and be frowned upon. It is recommended that non-compete agreements cover only a specific radius or area. - Time limit
As with the issue of geographic coverage, agreements with no time limit is frowned upon, and less likely to be upheld in court. - Trade secrets
The individual trade secrets of a company is what differentiates them from their competitors. Non-compete agreements generally restricts an employee from sharing these secrets with a competitor or the public. Particular attention must be given to underline exactly what is considered a trade secret and what information can or cannot be shared with the public. It is important to specifically address this in a non compete agreement so that your company is fully protected under the law. - Solicitation
Consideration must be given to prevent ex employees from actively soliciting customers of the former business, or individuals with whom the former employee had personal dealings. Restricting former employees from soliciting prospects or customers with whom he/she had no or little contact is frowned upon, and may be deemed overreaching. - Other Considerations
Depending on the specific profession of the employee, there may be restrictions on what type of non compete agreements are allowed. Agreements not only vary from profession to profession, different states also have different rules in regards to non-compete agreements.
Drafting A Non Compete Agreement
Some simple tips will help you in drafting an effective agreement:
- Put It In Writing
Make sure this is a document that is executed at the beginning of employment - Be Clear and Specific
Be sure to spell out specific restrictions, such as what comprises confidential data (business plans, customer lists, etc) and try not leave anything open to interpretation. - Limit Your Agreement
Remember to put a limit on geographic coverage and time. - Document
Be sure to include documentation that clearly shows the employee understands the implication of the non-compete agreement that has been executed.
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