Jump to Section
Need help with a Non-Competition Agreement?
What Is a Non-Competition Agreement?
A non-competition agreement is a contract between an employer and an employee. In this type of legal contract, the employee agrees that they will not compete with the employer during their employment or after their employment ends. Non-competition agreements prevent employees from entering professions or markets that the employer considers to be in direct competition with their business.
Image via Unsplash by huntersrace
Employers may also wish to create non-competition agreements to prevent former employees from revealing sensitive information or secrets about:
- Future projects
- Methods and practices
- Public relations/marketing plans
You may also hear non-competition agreements referred to as:
- Covenant not to compete
- Non-competition clause or non-compete clause
- Non-compete covenant
- Non-compete agreement
Who Can Sign a Non-Competition Agreement?
Employers may ask employees to sign non-competition agreements to keep their place in a market. Those asked to sign non-compete agreements can include:
A non-competition agreement typically prohibits an employee from becoming a competitor or working for a competitor for a certain duration of time. Independent contractors and consultants may also be subject to a non-compete clause in their employment contract that seeks to avoid competition after they terminate a relationship and separate from the company.
Industries That Use Non-Competition Agreements
Non-competition agreements are commonly used in the corporate world in general. These agreements are also common in certain industries. Examples of industries that often use non-compete agreements include:
- The financial industry
- Information technology (IT)
How Does a Non-Competition Agreement Work?
Any non-compete contract must be both equitable and fair for all parties involved in the agreement. To be considered enforceable, a non-competition agreement must include certain information, such as:
Names and addresses of the individuals signing the agreement; this should include:
- The protected party (the party that requests the agreement).
- The noncompeting party (the party prohibited from working for a competitor).
- A reason to enact the agreement
- The effective date, or date on which the agreement begins
- The location/geographic area covered by the non-compete agreement
- Specific dates during which an employee cannot work in a competitive sense (duration of the agreement)
- Details about how the non-competing party will be compensated if they agree to the contract's terms; this is called compensation or "consideration."
Legalities of Non-Competition Agreements
A valid non-competition agreement must be reasonable in both scope and duration. A non-competition agreement also must protect a legitimate business interest for it to stand up in court.
When Are Non-Competition Agreements Enforced?
A non-competition agreement will be enforced when the relationship between employer and employee ends, if the employer wants to prevent that employee from competing against them in their new position. Things considered competition can include:
- Working for a competitor within the same market
- Starting a new business in the same field
- Recruiting the previous company's workers to leave with them
However, non-competition agreements must meet certain criteria to be enforceable. Legal counsel should review any non-competition agreement to make sure it isn't overly harmful or restrictive to the employee.
Additionally, enforceability of non-compete agreements can vary from state to state. The legal status of these agreements is a matter of state jurisdiction in the United States. Recognition and enforcement of non-compete agreements varies significantly between states; some states will not enforce them at all.
A Non-Competition Agreement Must Be Reasonable
Most states that do allow for non-competition agreements have some kind of standard regarding reasonable restrictions on:
- Ability of a worker to find employment
- Geographic scope
- Length of time
An employer can set non-competition agreements only within realistic timeframes. You cannot prevent your former employees from permanently furthering careers in your field. You should always determine the effective dates of an agreement in advance and work with a lawyer to make sure your agreement will be considered reasonable.
Additionally, jurisdictions can vary widely in how they interpret what terms of a non-competition agreement could be considered overly restrictive or onerous for an employee.
The Importance of Consideration
A non-competition agreement will not be enforceable if there is no consideration. Consideration is a legal term that refers to an exchange of value.
Consideration for an employee who is newly hired might just be stating in the agreement that the willingness to hire the employee is the value the employer is exchanging for the new employee's agreement not to compete. However, if you are creating a non-competition agreement for an existing employee, there must be additional consideration for an agreement to be enforceable.
While consideration does not need to have huge value, it must be a real benefit that the employee could not otherwise receive. Examples of additional consideration for an existing employee includes:
- Change in status from "at-will" to "contract-employee."
- Higher salary
- New benefits
- New job title and/or responsibilities
Benefits of Non-Competition Agreements
The use of non-competition agreements has various benefits. These advantages include:
- Giving employers incentive to provide training: A company may not want to provide costly training if employees will just take skills learned to another company. A non-compete agreement reduces the risk of an employee learning skills via training and then leaving the company.
- Protecting trade secrets: Non-competition agreements may prevent an employee from taking sensitive information to a company's competitors.
- Reducing turnover: If an employee has a lesser desire to keep changing jobs, they may be a good fit for a company that uses an employment non-compete clause.
Drawbacks of Non-Competition Agreements
Non-competition agreements also come with certain drawbacks. For example, they may reduce a potential employee's bargaining power. If an employee is asked to sign an agreement after they first begin work, they may have little leverage.
Non-competition agreements can also have an adverse effect on the general workforce. These agreements may prevent top talent from using their experience and skills, causing them to leave the field entirely.
Image via Unsplash by officestock
Tips for Writing a Non-Competition Agreement
If you are considering writing a non-competition agreement for your business, there are certain tips to consider to make your agreements more successful. These include:
- Follow your state's laws: It's important to know the laws of your state in particular. Some states, such as Texas and California, often don't enforce these kinds of agreements, and they won't support employers if there are disputes.
- Let employees and competitors know about your policy: This is better than keeping your policy a secret.
Make sure your agreement isn't too restrictive:
Non-competition agreements that put too many restrictions on an employee are more often rendered unenforceable. To make sure you don't create too many restrictions but still protect essential information, you should:
- Define what you want to protect.
- Determine specific restrictions that will help you accomplish that goal.
- Relate how those specific restrictions help you to protect business interests.
- Remind employees of the agreement: If an employee leaves your company, remind them that they signed a non-compete agreement previously and that they should review the document to avoid potential problems.
- Write non-competition agreements for key employees: General agreements that all employees must sign when joining a company typically do not hold up in court. Consider writing agreements for specific, key employees.
Non-Competition Agreements vs. Non-Disclosure Agreements
Non-competition agreements are not the same thing as non-disclosure agreements, or NDAs. A typical NDA will not stop an employee from taking a job with a competitor. NDAs are designed to prevent employees from revealing or sharing information an employer deems confidential or proprietary.
Here's an article where you can learn more about non-disclosure agreements.
Types of information non-disclosure agreements may cover include:
- Client lists
- Information about products in development
- Underlying technology
A non-competition agreement can be a useful tool for employers. It's important to work with a trusted lawyer who understands the intricacies of this type of agreement in the state where you do business.
Meet some of our Non-Competition Agreement Lawyers
John Daniel "J.D." Hawke is an experienced attorney with a law practice in Mobile, Alabama. He was born in Fairhope, Alabama and after earning his undergraduate degree at Auburn University, he received a law degree from Thomas Goode Jones School of Law in 2010. After law school, he formed the Law Office of J.D. Hawke LLC and over the last decade he has fought incredibly hard for each and everyone of his clients. His practice focuses on representing people facing criminal charges and clients dealing with family law matters. In addition to criminal defense and domestic relations cases, he also regularly handles contract disputes, personal injury cases, small business issues, landlord/tenant disputes, document drafting, and estate planning. He is licensed to practice law in the State of Alabama and the United States District Court for the Southern District of Alabama.
Thomas Codevilla is Partner at SK&S Law Group where he focuses on Data Privacy, Security, Commercial Contracts, Corporate Finance, and Intellectual Property. Read more at Skandslegal.com Thomas’s clients range from startups to large enterprises. He specializes in working with businesses to build risk-based data privacy and security systems from the ground up. He has deep experience in GDPR, CCPA, COPPA, FERPA, CALOPPA, and other state privacy laws. He holds the CIPP/US and CIPP/E designations from the International Association of Privacy Professionals. Alongside his privacy practice he brings a decade of public and private transactional experience, including formations, financings, M&A, corporate governance, securities, intellectual property licensing, manufacturing, regulatory compliance, international distribution, China contracts, and software-as-a-service agreements.
Attorney of 6 years with experience evaluating and drafting contracts, formation document, and policies and procedures in multiple industries. Expanded to estate planning last year.
George is a lifelong Houston resident. He graduated from St. Thomas High School and then Texas A&M University. He obtained his Doctor of Jurisprudence from South Texas College of Law in 2007. He is experienced in real estate, estate planning & probate, civil/commercial matters, personal, injury, business matters, bankruptcy, general counsel on-demand, and litigation. He is active in the community serving as past-president of the St. Thomas Alumni Board, a current member of the Dads Club Aquatic Center Board of Directors, current member of the Dickinson Little Italy Festival of Galveston County Board of Directors, and former PTO President for Briarmeadow Charter School.
My clients are often small and medium size technology companies, from the "idea" stage to clients who may have raised a round or three of capital and need to clean up a messy cap table. I help with all legal matters related to growth that keep founders up at night - hiring people, allocating equity, dealing with shareholders and investors, client negotiations and early litigation counseling (before you need a litigator). I've seen a lot, and because I run my own business, I understand the concerns that keep you up at night. I’ve been through, both on my own and through other clients, the “teething” pains that will inevitably arise as you scale-up – and I’m here to help you. I have over 20 years international experience devising and implementing robust corporate legal strategies and governance for large multinationals. I now focus on start-ups and early/medium stage technology companies to enable a sound legal foundation for your successful business operations. Many of my clients are international with US based holding companies or presences. My 17 years abroad helps me "translate" between different regimes and even enabling Civil and Common Law lawyers to come together. Regularly, I handle early stage financings including Convertible Notes, Seed and Series A/B financings; commercial and technology contracts; international transactions; tax; mergers and acquisitions.
Sammy Naji focuses his practice on assisting startups and small businesses in their transactional and litigation needs. Prior to becoming a lawyer, Sammy worked on Middle East diplomacy at the United Nations. He has successfully obtained results for clients in breach of contract, securities fraud, common-law fraud, negligence, and commercial lease litigation matters. Sammy also counsels clients on commercial real estate sales, commercial lease negotiations, investments, business acquisitions, non-profit formation, intellectual property agreements, trademarks, and partnership agreements.