How And When to Use Non-Compete Agreements Appropriately
by JamieD, Former Moderator
- Created: June 2, 2010, 12:44 pm
- Updated: October 21, 2011, 11:46 am
Employees have access to a business's valuable information and trade secrets during their employment. But what happens when they no longer work there, or if they leave to work for a competitor? It's important to consider the effect that it would have on your business if this scenario were to happen, and to take the necessary precautions. Many employers combat losing valuable employees and trade secrets to a competitor through non-compete agreements.
What is a non-compete agreement?
Non-compete agreements are drafted and used by employers to prevent former employees from divulging privileged information or working for a competitor directly after leaving their business.
Why are non-compete agreements necessary?
When an employee leaves a business, they sometimes have an opportunity to use their experience and knowledge of that business for personal gain. Whether a person leaves voluntarily or not, they can knowingly or unknowingly divulge business secrets. According to the International Trade Administration, a trade secret can include a formula, pattern, compilation, program, device, method, technique or process that is used in one's business, and has independent economic value that provides an advantage over competitors who are not aware of it or use it. For example, an employee who has worked for your business for 5 years resigns and is quickly hired by a competitor. While meeting to discuss new potential business opportunities, they share examples of what worked for them in their previous job. They have just unknowingly divulged privilege information to a competitor. A non-compete agreement protects against acts such as these, as well as more intentional purposes.
What do non-compete agreements protect?
Non-compete agreements can vary according to a business's specifications. In general, they protect against losing employees to competitors and former employees divulging information and trade secrets they acquired during employment. Agreements generally designate a time period in which former employees cannot work for any competitor.
What considerations should an employer take when creating a non-compete agreement?
When drafting a non-compete agreement, it's important to have a solid business reason for the agreement. An example of a good reason would be to protect a trade secret. If a judge does not feel that a non-compete agreement is based on a solid reason, they may not uphold it's validity in court if contested. Non-compete agreements that appear to limit employees unnecessarily or simply punish them from leaving a business are unlikely to hold up in court.
Non-compete agreements should be simple and brief. They should not provide details on competitors or outline what constitutes as privileged information. To get a better idea of what a non-compete agreement may look like for your business, see this template* from the University of Minnesota.
How do you decide which employees should sign non-compete agreements?
It's important to carefully consider which employees should sign non-compete agreements. If an employer makes all employees sign an agreement for no concrete reason, a judge may not be likely to uphold these agreements in court. Because of this, it beneficial to choose employees that have special access to privileged information to sign non-compete agreements.
Are non-compete agreements enforceable in every state?
Non-compete agreements are subject to state laws, so the validity and the enforcement of these contracts differ from state to state. For example, non-compete agreements are not enforceable in California except in very rare circumstances. In some states, a non-disclosure agreement, which establishes the confidentiality of shared knowledge or materials and restricts third party access, is an appropriate supplement or alternative to non-compete agreements
Check with a small business expert in your state to find out the laws on enforcing non-compete agreements in your area.
Have more questions about non-compete agreements? Discuss in them in the Community:
* Directs user to a non-government website.
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