Download Non-Compete Agreement Template for free

What is a Non-Compete Agreement?

A non-compete agreement is a contract made between an employer and an employee, where the employee promises to not enter into direct competition once the employment period is over, and also while they’re still employed at that particular place. This agreement also prohibits employees from talking about sensitive information or secrets related to the company both during the employment period and post it.

Such non-compete agreements usually specify a period of time during which the employee is not allowed to work with a direct competitor once his/her employment term reaches an end. Employers often resort to non-compete agreements in order to maintain their position in the market, and those who are made to sign these agreements include consultants, employees, and also contractors.

Non-compete agreements are pretty popular in the media and entertainment industry. If a popular talk show host, for example, started working for a different channel, the viewership is bound to shift, and no TV channel wants that.

The sector of information technology sees quite a lot of non-compete agreements as well, because employees belonging to the IT sector are often privy to information that must remain within the confines of the company. The field of manufacturing, corporate sectors, and the financial industry has such agreements, too.

Employers generally issue non-compete agreements so as to make sure that once the employment period is over, the employee is restricted from either working with a direct competitor or starting a business of their own in the same niche. This is also why independent contractors and consultants are subjected to non-compete agreements, so that they can’t associate themselves with companies from similar fields.

What is Included in a Non-Compete Agreement?

Non-compete agreements should be reasonable and fair for both the employer and the employee. In order for it to be considered legally binding, there are certain elements that need to be included in the agreement. These elements include a reason for creating the agreement, a specific date stating the inception period of the agreement, dates specifying the time when the employee will be barred from working with direct competitors, along with the location specified by the agreement, and the compensation to be given to the employee for agreeing to the terms. Duration, scope, and geography, therefore, form the three vital elements of a non-compete agreement.

An example of a non-compete agreement would be between a company that already has about three or four companies as competitors in a similar field, and a salesperson working for the company. The agreement can then ensure this salesperson doesn’t get in touch with their competition, thereby revealing private information such as their list of clients and so on. Yet another example could be that of a software company that signs a non-compete agreement with its developers so that they can’t interact with the competitor companies regarding the new products being created.

Legalities of Non-Compete Agreements

As far as the United States is concerned, the legal status of a non-compete agreement depends on the state jurisdiction. The recognition and enforcement of these agreements vary from one state to another, and the rules differ depending on several factors, such as what the employer considers as competition, what the restrictions of the agreement are, and so on.

The feature that usually makes a non-compete agreement legally binding are limitations that are reasonable. This entails having clear regions where the employee can or cannot work, the duration that must be adhered to before an employee is allowed to work in those said regions, and the like. The validity of these agreements, however, vary from state to state.

In Oklahoma and North Dakota, for example, you cannot enforce non-compete agreements. Non-competes were banned for tech companies in Hawaii back in 2015, and Utah changed its laws in 2016, thereby limiting non-compete agreements to just a year. In California, on the other hand, non-compete agreements aren’t recognized at all, and in case an employer is found binding an employee to one once the employment is over, they can even be sued.

What are the Benefits of a Non-Compete Agreement?

Non-compete agreements benefit not just the employers, but the employees as well in some way or another. Here are the advantages of drafting a non-compete agreement:

Protecting Privileged Information

This is the first and most important benefit employers derive from having a non-compete agreement. It enables them to make sure that an employee can’t work with a direct competitor after leaving the company.

When an employee joins a company, a lot of resources are often spent training them in order to expand their productivity. During this process, the employees get access to most of the crucial information accessed by the company to keep up with its operations and maintain its place in the competitive market. Therefore, this is a secret that must be maintained in order to differentiate them from the rest.

A non-compete agreement helps in keeping this secrecy, so that the insider information doesn’t reach the ears of the competitors. It also protects the company in the way that the employee can’t use these very trade secrets to inaugurate a business of their own.

Keeping Unfair Competition at Bay

Business owners can sell their company at a profitable sum, and then choose to open a similar business nearby, thereby competing to have the same type of target audience. This is what leads to unfair competition taking place.

Since these business owners will have access to their old customer base, it will be easier for them to attract buyers. Therefore, non-compete agreements can prevent business owners from opening similar brands and competing with the existing customer base.

Increases Trust and Responsibility

This is the first advantage that employees can make use of with non-compete agreements. It’s true that it might seem a little restrictive to sign such an agreement, but it also comes with compensation that make it worth it to sign the agreement.

It means that you get access to the inner workings of the organization, thereby building a foundation of trust between you and the employer. It also helps you take on more responsibility in your job, which is always a great option as it helps in the growth of your career.

Better Negotiation Power

In case you’re not happy with the employment terms put forward, signing a non-compete agreement actually increases your power to negotiate with your employers. Since signing this agreement means applying restrictions to your future in case you do leave the company, you have the right to negotiate and modify certain terms and conditions according to what is more convenient to you.

What to Remember Before Signing a Non-Compete Agreement

Before you sign a non-compete agreement, remember to take some time to go through it first. No employer can force you to sign the agreement before you get to peruse through all the terms and conditions. Take a day or two to understand all the implications of the non-compete agreement.

If there are certain points that seem unclear or iffy to you, you can consult with an employment attorney. Once you feel like you’re ready to sign the contract, be sure to ask for a copy of it. You have the legal right to do so, and no company should let you be without a copy of it for yourself. If in case changes are to be made, your employer has to provide you with a copy of the new agreement.

As stated earlier, you’re allowed to make negotiations with relation to the agreement. It’s not necessary that you agree to the conditions stated in the agreement. You can come up with counterpoints of your own, so that both the parties can have an agreement that’s beneficial for everyone.

You should know what you want while making these negotiations. Have very clear arguments and demands in your head. Perhaps the wording seems vague to you or the specifications are unfair. In that case, be prepared to state what you would like in that place.

Also, try to understand the concerns of the company as to why they’re looking to get a non-compete agreement signed. This is why it’s wise to make them know that you agree with their concerns. Having a good understanding about each other’s worries can help in building a level of compassion, post which you can also reach a common ground regarding things such as the geographic limitations of the agreement, the duration, etc.

Since restrictions are bound to apply post signing a non-compete agreement, getting career reassurance from your employer is of vital importance. You should let them know about your expectations while you work for them, such as perks, chances of getting a promotion, ability to cooperate with different departments, and so on.

At any given point of time, don’t be afraid to reach out to people who can help in guiding you and giving you advice. In addition to an attorney, you can also consult the HR department to get a clearer idea of the agreement.

Myth busting: common misconceptions about non compete agreements

Non compete agreements are critical for protecting business interests, but several misconceptions can create confusion. Let's address and clarify five common myths related to non compete agreements to enhance your understanding of this important legal tool.

Myth 1: non compete agreements are always enforceable

Clarification: The enforceability of non compete agreements varies significantly based on the governing law in different jurisdictions. While some states uphold these agreements, others may limit their scope or deem them unenforceable. It's essential to consult with a legal professional to understand how applicable law affects the enforceability of your non compete agreement.

Myth 2: non compete agreements only apply to high-level employees

Clarification: A common belief is that non compete agreements are only relevant for high-level executives. However, businesses may require non compete agreements for various employees, especially those with access to confidential information or trade secrets. Employees at different levels may possess know how and insights that are crucial to legitimate business interests.

Myth 3: non compete agreements cover all types of work restrictions

Clarification: Non compete agreements are specific in nature and typically focus on preventing employees from joining competing businesses or starting a similar venture. They do not generally cover other aspects of employment, such as working hours or conditions. It's important that the parties agree on the specific terms, including the scope and duration of the non compete clause.

Myth 4: a non compete agreement template is sufficient without legal advice

Clarification: While a non compete agreement template can provide a starting point, it is not a substitute for professional legal advice. Templates may not address specific business interests or comply with local laws. To ensure the agreement is comprehensive and enforceable, it's advisable to work with legal counsel to tailor the compete agreement to your specific needs and ensure it aligns with governing law.

Myth 5: non compete agreements are not needed if there's no immediate threat

Clarification: Some believe that non compete agreements are unnecessary unless there's an imminent threat of competition. However, these agreements are proactive measures that protect a company's interests by preventing potential future competition. They ensure that confidential information and trade secrets remain secure even after the working relationship ends. The employee acknowledges the terms and conditions set forth, providing a safeguard for the business.

By understanding these myths and the facts behind them, you are better equipped to utilize non compete agreements effectively. Always consider consulting with a legal professional to draft or review your agreement, ensuring it is tailored to your business and legally sound.