What Is A Non-Compete Agreement?
Non-compete agreements, also known as Covenant Not to Compete (CNC), Non-Compete Clause (NCC), and restrictive covenants, are becoming increasingly common in employment applications, employment agreements, and in contracts for the sale of businesses. The purpose of this agreement is restrict any employee from going into a business same as their former company for a specified period within a certain geographic area. When an employee signs a non-compete agreement, they are agreeing that they will not enter in any business of similar nature, as an owner, partner, employee, significant investor, independent contractor, or any other form of line of work that makes them a competitor or puts the confidential information of their business at risk.
Protecting Your Business With Non-Compete Agreements
A non-compete agreement is specifically designed to keep your business from losing potential employees to competitors, and for protecting critical information. If one of the employees knows about your trade secrets or have access to sensitive information, you will have to take measures to make sure that the employee doesn’t disclose the information to others. A trade secret can be anything – a formula, program, method, process, technique, compilation, or pattern – which gives your business competitive advantage and has to be kept a secret so that no external person or entity can benefit from it.
When such an employee is fired or has quit the job, they can use this information for personal gains. For example, if you are in the content development industry, and one of your salespersons leaves job for any reason whatsoever, it is possible that they may start their own business and contact your existing clients and offer them a better deal. It is also possible that your competitor may hire that salesperson by offering them a better salary and benefits package, and use the critical information your employee has to steal your clients.
But if your employee has signed a non-compete agreement, they cannot disclose your trade secrets or crucial information to your competitors or start a similar business.
Creating A Non-Compete Agreement
For drafting a non-compete agreement, you will need information at the ready, some of which you may already know. For other information, you may have to ask a few simple questions from the consenting party to complete your agreement. The following are some mandatory provisions that should be included in a non-compete agreement:
Names And Addresses Of The Concerned Parties
This is an obvious one. You will be required to include the names of the protected party, i.e. your company, and the consenting party, i.e. the employee being prohibited from working against the protected party.
The Effective Date Of The Agreement
The agreement should clearly mention the date from which it will start protecting your company against your employee from working for a competitor or as a competitor.
Outline The Reasons For Entering A Non-Compete Agreement
You have to include a reason in the agreement for having the employee sign the non-compete agreement. The reason can as simple as the employee working at a key position of the company and have access to confidential information, and is leaving for personal reasons.
Specify The Duration And Geographic Area For Non-Compete Agreement
You must specify the duration till which the consenting party cannot open their own business or work at a competitor business. In most cases, the time period depends on how long the critical information that you want to protect has value. However, the duration has to be reasonable for the court to approve it.
You can put geographical restrictions as well. This may be a particular city or state (e.g. New York), or an area specified in terms of distance (50 miles radius of New York or of your company), or you can also describe the geographical area in detail. This greatly depends on the job description of your employee, as to how important their duties were for your business. Typically, the court allows you to put restriction on only those locations in which you are conducting business.
Employers are allowed to even include the names of the companies where the employee cannot seek employment.
Names Of Individuals Signing The Agreement
You must include the names of the individuals who have authority to sign the non-compete agreement.
You must outline the compensatory benefits that the employee will be given for entering into this agreement. You have the option to offer them monetary compensation or it can be a promotion or a raise.
Apart from the above mandatory requirements, you can also add a few optional terms in your non-compete agreement. They can be:
- The consenting party will be forbidden to hire employees of the protected party. But you will have to add a time period for this clause to be enforceable.
- The consenting party will be forbidden to solicit the clients or customers of the protected party. You will have to include a timeframe during which this clause will be effective.
- The consenting party will be forbidden to expose or divulge critical business information of the protected party. There are two ways to go about this clause. You can either specify a timeframe during which it will be effective, or you can set a short duration in which the consenting party has to return the property or records associated with the business. The time limit for the latter should be reasonable enough for the employee to compile and hand over the records or property easily.
Drafting this agreement can become a breeze if you take a professionally created non-compete agreement template and use it as a reference.
Legal Requirements Of A Non-Compete Agreement
There are a few legal requirements that an employer needs to fulfill in order for the court to approve the non-compete agreement. It must:
- Be reasonable in terms of time, geography, and scope;
- Designed in a way to protect only a legitimate business interest; and
- Include considerations according to the circumstances when it is signed.
The court requires the non-compete agreements to have valid consideration for the consenting party. The employee must be given something of value in return for their undertaking to refrain from using your sensitive information to their benefit. If an employee is signing this agreement at the time of their joining, you may consider the employment opportunity to be enough compensation for the promise. But if you ask the employee to sign it after starting their job, you will have to provide them with some additional benefits, as the mere promise of employment won’t be enough to be deemed as a valid consideration. This may comprise of a promotion or a monetary raise that was initial not the part of their employment contract.
When A Non-Compete Agreement Is Used
There are certain circumstances where you can use a non-compete agreement. They are:
- When an employer and employee relationship is terminated, including both resigning and firing the employee. The employee has to enter a legal agreement that they will not compete against the employer in any way.
- When two business partners are terminating their business relationship, and the one parting from the company is required to sign this agreement.
- When an independent contractor and an organization are terminating a business relationship, they are required to sign this agreement so that they don’t use the organization’s information to against them to get a competitive advantage.
Tips For Drafting A Non-Compete Agreement
Now that you know what you need to include and when to use a non-compete agreement, here are a few tips for making it more effective.
Determine The Type Of Restrictions
You must first evaluate what are the legitimate interests of your business that you want to protect. Based on this, answer the question: do you need to include a non-disclosure, non-solicitation of employees, non-solicitation of customers, or non-competition provision in the agreement or a combination of these four? This is important because the court will require you present a legitimate reason for getting your employees to sign a non-compete agreement, and it may reject it if you include provisions that are not applicable to your business.
Include Law Provisions
It is imperative that you explicitly state all those laws under which the employee is prohibited to breach the agreement. Moreover, it should also state the venue where the legal action taken against the employee will be heard.
The Parameters Should Be Employee, Business, And Industry-Specific
For drafting an effective non-compete agreement, you must outline those special facts that put your business in danger if they are exposed or divulged. This means that you have to include provisions that are specific to your industry, employee, and business. The purpose of doing so is to restrain ordinary competition. It is possible that a former employee is providing ordinary competition just because they are being hard-working, personable, and intelligent in their new workplace. But with specifying special facts, you can put them at an unfair advantage in competing against your business.
Make Agreement For Key Employee Positions Only
It should not be necessary that every employee of your company must enter into a non-compete agreement. It is recommended to be selective in deciding the employee positions, as not employees have access to information that can harm your business in any way. Once you have determined which positions should sign this agreement, specify it in your company policy so that the rule is applied uniformly throughout the organization.
Outline The Requirement For Returning Confidential Information And Documents
You should mention in the agreement that employees must return any confidential documents or information regarding the company within a specified period after their termination. To make things clear, you can also specify which documents or information they have to return to avoid any complications in the future. These may include derivations of company documents, cover copies, and data stored in electronic devices, like laptops, tablets, USBs, etc.
Tailor The Agreement Smartly
If you want to avoid unreasonable restrictions, you should tailor your non-compete agreement and make it as explicit as possible. For this, you must first identify which business interest you want to protect and whether you can use the agreement for doing it legitimately. After that, tailor the agreement to safeguard those interests. Mostly, the most valuable information that companies want to protect is of their client relationships. In such a case, prohibiting the employee from soliciting your clients will do the trick. That way, you don’t have to forbid them from seeking employment at your competitor business or starting a business to compete against you.
Use Easy-To-Understand Language
The language you use in your non-compete agreement should be easily understandable. The employee should able to understand the terms and conditions clearly, keeping their academic background in mind. If it is simple and short, it will reduce the chances of it being challenged in the future. For making sure that the employee understood the agreement, you can draft a cover letter that explains its terms and conditions, and what employee is agreeing to by signing it.
If you want to create a non-compete agreement to protect your business, you can download our professionally-made non-compete agreement sample from this page.
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