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What Is a Noncompete Agreement?
A noncompete agreement — also known as a noncompete covenant, a covenant not to compete, restrictive covenant, or noncompete clause — is a legal contract between employees and an employer that prevents employees from entering into competing business ventures if they terminate their employment. Businesses may ask new employees to sign this type of agreement to ensure that they don't take the knowledge, skills, and relationships that they gain on the job and use them to set up business as a direct competitor. Employees gain distinct knowledge of their industries, which could make them formidable competitors, as they're aware of the following:
- Pricing strategies
- Product formulas
- Client information
- Business methods
- Pending products
- Research and development information
- Marketing strategies and plans
While a noncompete agreement offers advantages for the business, it may not be as appealing to an employee. A company doesn't necessarily want to lose the valuable investment made into the training, education, and development of an employee. However, these individuals must still retain the basic right to seek other employment opportunities and pursue professional advancement.
Enforceability of Noncompete Agreements By State
Noncompete agreements are not allowed in all states. This type of contract is unenforceable in the following states:
- North Dakota
Employers in these states may still ask employees to sign this type of contract in the hopes that the individuals are unaware of their rights and will believe that they cannot legally compete with the business. In California, an employer who requires their employees to sign a noncompete agreement can be sued.
Other states may allow noncompete agreements but confine them to particular industries or circumstances. Do some research on your local laws and understand what's applicable in your state.
What's Included in a Noncompete Agreement?
- The date the agreement becomes effective This date is typically the first date of employment for a new hire. However, some noncompete agreements are executed later in the employee's term. This contract may become necessary before an employee earns a promotion or comes into contact with sensitive business information.
- The reason for the agreement The employer must specify the scope of the noncompete agreement and the purpose for this contract. A noncompete agreement makes more sense for a high-level employee who will work with sensitive company information than for an hourly worker with minimal responsibilities.
- The duration of the agreement Noncompete agreements must be reasonable. These agreements are typically limited to a year or two after employees terminate their employment with the company.
- Compensation for complying with the terms For a new hire, the job itself is usually considered adequate compensation for agreeing to the terms of the noncompete agreement. However, if you're asked to sign a noncompete agreement for a job you're already working in, you may want to ask for a promotion, raise, or other benefits in exchange for your signature on the contract. Some states require a payment of consideration in exchange for signing a noncompete agreement. Courts are more likely to uphold the agreement if the employee received some type of compensation.
The noncompete agreement should also include any relevant specifications regarding the type of competition prohibited. For example, the employee may not be allowed to work for a competitor within a particular region or industry. Jobs that fall outside of the geographical area or specialized industry, however, may be acceptable. The employer may also specify particular companies for which an employee cannot work.
How Enforceable are Non-Compete Agreement?
For a court to uphold a noncompete agreement, it must deem the contract reasonable. It is not reasonable for an employee to enforce restrictions so confining that an individual cannot find gainful employment outside the current job. People have the right to earn a living, and the noncompete agreement cannot take this right away from them.
When a court is evaluating a noncompete agreement to determine whether it's reasonable and enforceable, it will consider whether:
- The employer has a legitimate need to protect his or her business interests
- The geographical scope is reasonable in size
- Employees can find other employment opportunities that will not force them to violate the contract
- The term of the noncompete agreement is appropriately limited
- The agreement is unreasonably broad regarding the type of work prohibited
These factors are considered both individually and in conjunction with one another. A long-term agreement is more likely to be enforceable if it's paired with a small geographical scope. Likewise, a noncompete agreement that covers a broad range of companies has a better chance of standing up in court if it applies only for a month.
What Voids a Noncompete Agreement?
An employer cannot typically enforce a noncompete agreement executed simply to keep its employees from leaving the business. The company must prove that it has a legitimate reason to be concerned about employees taking jobs elsewhere. For example, if employees have knowledge about a secret recipe for a major product or have close relationships with and sensitive details about a business's top clients, they could present a notable risk to the company if they took the information elsewhere.
Noncompete Agreements Between Companies: Sale of a Business
If a business is sold to new owners, noncompete agreements may come into play. The entity that acquires a business is often wise about having employees retained within the business sign a noncompete agreement. Lacking this form of protection, the previous owners of the business may poach employees and set up direct competition.
If employees were previously subject to a noncompete agreement, a purchaser would want to investigate these contracts when acquiring the company. The new noncompete agreement must include an assignment provision that allows the new business owner to maintain the contract under new management. If such a provision is not in place, the previous noncompete agreement may become void.
How Are Noncompete Agreements Enforced?
If you want to be released from a noncompete agreement, you should speak with your employer and get a signed document that releases you from the contract. Lacking this document, you are subject to the enforcement of this contract.
Your previous employer may request an injunction or restraining order preventing you from taking any type of employment that falls within the limits of the noncompete agreement. Courts often expedite these cases to protect the employer from potential damage. You may have only days or weeks to prepare your case with an employment lawyer if a hearing is scheduled.
A court may begin by issuing a temporary order that prevents you from taking a particular job. Likewise, the court might deem that your activities are temporarily permitted, but continue to investigate the case. The court may choose to grant an injunction, a legal order that will stop you from working in violation of the noncompete agreement. This injunction can restrict your activities for any period of time set forth by the court.
A noncompete agreement is a beneficial contract for employers in particular situations where an employee could do significant harm to a business by taking knowledge to a competitor. If you're asked to sign a noncompete agreement, review the document carefully to make sure it's valid within your state and does not prohibit you from taking reasonable actions to further your career.