Many companies have considered and implemented non-compete agreements; corporations and proponents say that these help protect trade secrets and legitimate interests while some employees and opponents criticize them as limiting employment opportunities. What is a non-compete agreement exactly and should your business implement one?
What is the Purpose of a Non-Compete Agreement?
The purpose of a non-compete agreement is to assist employers in minimizing the risk that one of their employees may terminate their employment with their current employer, and move on to work with another party where they will use intimate knowledge and information that they gained to assist the new party with competing with their previous employer.
For example, technical companies with trade secrets based around technical innovation often require some form of non-compete agreements. This prevents former employees who worked on new projects from taking that information to a competing technical company. Non-compete agreements usually specify a timeframe and geographical location where an employee is not permitted to compete.
How Long Does a Non-compete Agreement Last?
Non-compete agreements may not last forever. In fact, having a non-compete agreement that lasts for too long may cause the court to invalidate it. For this reason, employers commonly limit the term of non-compete agreement from two to three years. During the term of a non-compete agreement, an employee will usually not be permitted to work with a competing business or to start their own business that competes with their former employer’s business. Once a non-compete agreement expires, an employee is free to work with whomever he or she wants.
To ensure a non-compete agreement is viable, they must be geographically limited. However, the scope depends on the size of your employer. If your employer is a local company that has one office in California, a court may find an agreement that stops you from working throughout the U.S may be too strict. However, a court may find a non-compete agreement that stops you from working throughout the U.S reasonable if the business operates throughout the U.S.
Are Non-Compete Agreements Legally Binding?
Most states recognize the validity of non-compete agreements, meaning that they are enforceable. However, California, Colorado, Montana, North Dakota and Oklahoma have found non-compete agreements to be too restrictive on an employee’s right to earn a living, and are therefore not valid in these states.
Non-compete agreements can be invalidated for a variety of reasons even if they’re allowed in your state. These are usually because they unreasonably encumber the employee. Common reasons courts find non-compete agreements include:
- Lack of Consideration – For an non-compete agreement to be valid, your employer must have given you something of value in exchange for your agreement not to compete. If consideration is missing, your agreement may be invalidated by the courts.
- Too Long – A non-compete agreement must be reasonable and must not prevent you from seeking gainful employment for an extended period. Agreements that are two to three years in length are often reasonable, but anything longer than that may be invalidated by the court.
- Too Geographically Broad – An agreement must not be too geographically broad, meaning if your employer operates in a small geographical location, he may not bar you from seeking employment everywhere in the U.S. The agreement must be geographically limited in scope to prevent you from competing within the geographic location of your employer.
What Information is Included in a Non-Compete Agreement?
An effective and valid non-compete agreement is typically comprised of the following elements:
- Effective date of the Agreement – while this is usually the start date of employment or within a few days of beginning employment, employers may ask employees to sign non-compete agreements at any time.
- End date of the Agreement – this includes the specific dates during which an employee is not permitted to compete with his employer. A valid non-compete agreement will usually include the duration of the employment as well as two to three years after the employee leaves a company.
- Reason for the Agreement – the agreement should include the purpose that the employer is seeking the agreement. This can include certain trade secrets, knowledge of inside workings, or being privy to ongoing projects which could be stolen by competitors.
- Geographical Bounds of the Agreement – the agreement should limit itself to a geographical area if possible. For example, broadcast news is a very common area for non-compete agreements because the broadcaster spends time building up a reputation with the viewers of a local area network and the network will not want to lose its audience if a competing network poaches their employee.
- Employee Compensation for Agreement – while not necessary, non-compete agreements are more likely to be found valid if the employee was given some form of compensation in exchange for signing. This can be either monetary compensation or a change in job duties.
Speak to an Experienced Employment Law Attorney
If you are considering using non-compete agreements to protect your business interests, consult with an experienced employment law attorney at The Brown Firm. Our professional attorneys can assist you in creating non-compete agreements that will be valid and protective, and advise you as to the consequences and/or advantages of entering into a non-compete agreement.