Non-compete agreements are contracts between employers and employees. Companies use these contracts to limit competition and prevent trade secrets from spreading outside of the organization.
The terms of a non-compete agreement typically prohibit an employee from taking certain jobs during or after their employment with the company. This usually means they can’t work in certain industries, locations, or specific companies for a predefined time.
Suppose your company has employees, consultants, or independent contractors with trade secrets or sensitive information that could directly benefit your competition. In these cases, a non-compete agreement helps protect your company.
Non-compete agreements can protect sensitive details related to marketing plans, client relationships, pricing strategies, future product development, operations, and so much more.
But before you can effectively create and enforce non-compete agreements, there are several things you need to understand—this guide will explain it all. Let’s dive in.
Why Do Non-Compete Agreements Matter?
Non-compete agreements protect proprietary information and trade secrets. These contracts can also help increase employee retention and prevent the loss of customers to competing businesses. They also incentivize employers to provide in-depth training to their staff since the skills and knowledge won’t be taken to a competitor.
What Does Success Look Like?
Successful non-compete agreements must be two things—reasonable and enforceable.
The contract is useless if it won’t hold up in court. Like any other contract, the laws vary from state to state. So two identical non-compete agreements could be enforceable in one jurisdiction and be void in another.
For example, non-compete agreements are typically void and unenforceable in states like California, North Carolina, Oklahoma, and North Dakota. Some other state courts will only enforce non-competes in limited circumstances.
The terms of the contract must be reasonable for a couple of different reasons. First, reasonable non-compete agreements are more likely to be upheld in court.
Preventing an employee from working with a competitor for 20 years probably won’t be seen as reasonable if it’s brought before a judge. But 6-12 months is more reasonable and more likely to get enforced.
Additionally, if the terms of your non-compete are unreasonable, then your employees simply won’t sign them. Your employees might choose to work somewhere else where a strict non-compete isn’t required. This will limit your talent pool, which may create other problems with your business.
If you draft a non-compete and everyone refuses to sign it, you need to revisit the terms. But if you’re not getting any pushback from your employees, it’s a good sign for success—assuming the contract is enforceable in your state.
Another sign of success with non-competes is protecting client lists.
For example, let’s say your company operates in a B2B industry with just two other competitors in your region. If a sales rep develops tight relationships with your clients, a non-compete could prevent them from leaving your company and taking those clients with them.
Non-competes could also prevent new competition from entering your industry.
An employee with lots of drive and aspirations wouldn’t be able to quit, start their own business, recruit your other employees, and undercut your prices—at least not immediately.
The ultimate sign of success with a non-compete agreement is if a judge upholds the contract in court. Hopefully, you never get to this point since it would mean someone breached the contract. But this would prove that the non-compete was written properly and would likely prevent anyone else from breaching it moving forward.
Even if you never plan to bring your current or former employees to court, non-competes can reduce employee churn. If your staff is locked into an agreement, they’ll be more likely to stick with you for the long run, assuming they’re happy with the rest of their employment terms.
Case Study
To illustrate the benefits of a non-compete agreement in the workplace, here’s a real-life example from ARS Services.
ARS Services is an emergency restoration contractor operating in Connecticut, Rhode Island, Massachusetts, and New Hampshire. ARS had non-compete agreements with certain employees stating that the employee could not work in the disaster restoration industry for one year within 40 miles of any of the company’s six offices.
This is a unique industry, highly dependent on referrals from insurance adjusters and other contractors.
When one particular employee resigned from ARS Services, they took a job as a sales manager for Harvey Remodeling—a direct competitor in the same region.
ARS Services feared that adjusters and contractors would refer work directly to this former employee, therefore sending jobs to the competition.
Since the new employment was in direct violation of the non-compete agreement, ARS Services took the employee to court. A judge upheld the terms of the contract and prevented the former employee from working for Harvey Remodeling or any other competitor described in the non-compete.
One Secret Weapon For Non-Compete Agreements
Our secret weapon for non-compete agreements is LegalZoom. They make it easy for any business to draft employment agreements in minutes. Just answer some simple questions, and the system will auto-fill one for you.
What makes LegalZoom unique compared to other platforms that offer non-compete templates is its legal services. To ensure your document will be enforceable, you need to have an attorney review the terms.
LegalZoom’s business advisory services start at just $31.25 per month. This includes services for legal documents and contract reviews.
4 Essential Strategies For Non-Compete Agreements
These are the top four strategies and best practices to ensure the success of your non-compete agreements. Applying these tips will help things go smoothly for you and your employees alike.
Strategy #1: Get Non-Competes Signed During the Hiring Process
You should be as transparent as possible with prospective employees as it pertains to non-compete agreements. Even before you officially send them a contract, you should mention this clause during the interview.
The last thing you want to do is create distrust with your staff, especially new hires. Blindsiding them with a non-compete agreement a week or two after they’ve been hired can be considered poor taste, and it could potentially hinder the agreement’s enforceability depending on the terms of employment.
Let’s say the employee refuses to sign the agreement two weeks after they started. Now what?
You’re either forced to fire them, which could land you into trouble with employment laws, or you let them continue working without the protection of a non-compete. Either scenario is bad news for your business.
To prevent this from happening, send a non-compete agreement or include a non-compete clause in the initial employment contract. If you’re using HR software to onboard employees, it will be easy to send, store, and manage these contracts from a single place. Then you can keep the signed contracts on file with each person’s employment records.
Check out our list of the best HR software for options to consider in this category.
Ultimately, getting non-competes signed during the hiring process will help improve your employee retention rates. It’s a sign that new hires are committed to working with you. Otherwise, they wouldn’t sign the contract, and they’d seek employment elsewhere.
Strategy #2: Always Consult With a Legal Professional
Today, there are tons of great self-help resources and templates for businesses to follow—including tools for non-compete agreements.
But a template or any online resource, including this article you’re reading now, is not a substitute for legal counsel. I’m not an attorney, and I can’t legally advise you on how to create a non-compete agreement.
A lawyer is the only way to ensure your non-compete is enforceable. Otherwise, the contract is entirely useless.
Fortunately, there’s a middle-ground between self-help and hiring an attorney that charges $500 per hour. Online legal services like LegalZoom are perfect for contract reviews.
It’s a cost-effective way to have an experienced attorney review your non-compete agreement before sending it off to be signed by employees.
While even an attorney can’t ensure the contract is 100% ironclad, the chances of the agreement being upheld in court increase significantly if a lawyer helps you with it.
Strategy #3: Include a Reasonable Time Frame and Geographic Scope
Earlier, we discussed the importance of reasonable terms related to enforcement and the chances that the contract will be signed. Establishing a set period of time and geographic restrictions are a great starting point.
You don’t want to infringe on another person’s right to work. The idea behind a non-compete is simply to reasonably protect your business, not to keep them from working and earning a living.
Here’s a practical example to illustrate this point. Let’s say you own a bakery and have a secret family recipe for apple pie. A non-compete could prevent the head chef from starting a bakery across the street and using that recipe.
Saying that a former employee can never work for a competitor or never start their own business in your industry at all is not reasonable. But preventing them from working in your industry for two years within a 25-mile radius of your operation is much more reasonable.
Now let’s refer back to the real-life scenario described in the case study on ARS Services. In this case, the employee wasn’t allowed to work in that particular industry for one year within 40 miles of the company offices—which is reasonable.
Had that former employee got a job across the country immediately after leaving ARS Services, they wouldn’t be violating the non-compete.
In this example, ARS Services has no reason to restrict work across the country, as they aren’t directly competing with contractors in other regions.
For the agreement to be reasonable, your business needs to have a legitimate competitive interest in something specific. You can’t just put a blanket non-compete on everyone you hire. A cashier at a grocery store should be free to leave and work as a cashier for a competing grocery store—there’s nothing proprietary to protect here.
Strategy #4: Offer Adequate Compensation to the Employees
For a contract to be valid, there must be an exchange from the employer to the employee to limit that person’s opportunities in the future. You can’t restrict someone from working for a competitor if you’re not giving them anything in return.
Usually, the employee’s salary would be considered sufficient compensation. But that wouldn’t necessarily be the case if you’re asking existing employees to sign a non-compete.
If their job or compensation isn’t changing, they won’t have any interest or incentive to sign the contract. This could also cause problems if the non-compete is brought before a judge.
When asking a current employee to sign a non-compete, the request should come with a pay raise, some type of promotion, or another reward or bonus.
All of this relates back to what we discussed earlier in regards to employee retention. You don’t want non-competes to cause your staff to leave.
Instead, you want these contracts to help secure them for the long haul. Providing appropriate compensation will make this much easier.
Most Common Misconceptions of Non-Compete Agreements
There are lots of myths and misconceptions of non-compete agreements that cause businesses to make mistakes when drafting and enforcing these contracts. Here are the top misconceptions to avoid:
- Assuming the clause is indefinite: Non-compete agreements can’t last forever. What’s considered “reasonable” will vary based on the circumstance, but the time period usually won’t extend beyond one or two years.
- Non-competes are only for employees: While non-competes are commonly used for employment terms, they can also be used for consultants and contractors. Not having signed non-competes from contractors can be just as damaging as failing to get them from direct employees.
- Confusing non-competes with NDAs: Non-compete agreements and non-disclosure agreements are two different contracts. Non-competes are a one-way agreement to protect a business, whereas an NDA is typically a mutual agreement between two parties to protect confidential information and data.
- Being too vague in the agreement: If the contract terms don’t clearly define competitors, industries, locations, clients, or proprietary information, the agreement probably can’t be enforced. Be as specific as possible to increase the chances your non-compete will hold up in court.
In short, non-compete agreements can be extremely valuable when it comes to protecting your business. You can use this guide as a resource as you start to implement non-competes into your hiring process and employment terms.