What Is a Non-Compete Agreement? Your Questions Answered
A non-compete agreement is a legal contract—or specific clause within a larger contract—that specifies a former employee may not work for a competitor for a certain period of time after their employment has ceased. These contracts are usually limited in time to a year or two, but contracts vary based on a number of circumstances, including the type of employment. Certain professions forbid the use of non-compete agreements as a matter of public policy, especially the medical profession. However, these restrictions vary between different states.
Employers often require new employees to sign a non-compete agreement at the start of their employment. This helps to protect proprietary information and trade secrets to which the employee had access during their employment. This can significantly reduce the risk to a business and protect intellectual property from use or disclosure.
Whether the agreement is a separate contract or included in a larger employment agreement is up to the employer. However, the non-compete language should be clearly labeled and conspicuous to the reader. Hiding this provision may make it unenforceable if it is challenged in court. A business should be open about non-compete language when having employees sign an agreement.
Who uses non-compete agreements?
Non-compete agreements are especially common in industries that utilize proprietary information and intellectual property. They are also very common in the media. For example, a television station may have concerns that a popular media personality may leave for a rival station. A non-compete agreement may state a specific amount of time the personality must wait before taking the new job.
Non-compete agreements are also common in the information technology (IT) industry. IT employees are often given access to proprietary information that would be valuable to another company. In fact, many of these employees developed the technology upon which a company relies. A non-compete agreement helps to protect that information and the resources the company provided the employee to help create the project. Other common areas include:
- White-collar jobs
- Financial industry and banking
What is the purpose of a non-compete agreement?
One of the primary reasons these agreements exist is to protect trade secrets or goodwill of the company for which the employee worked. A company invests a great deal of time, training, and money into an employee. This investment is meant to pay off for that company, not a competing business that could take advantage of the situation for their benefit.
Non-compete agreements are also designed to protect the unique information the employee possesses because of their employment. Employees with unique knowledge of intellectual property, designs, or trade secrets may be subject to a non-compete agreement. This helps limit the fallout from an important employee leaving your company for another. It also helps limit the potential for patent or copyright infringement.
When do I need a non-compete agreement?
Your business needs an agreement when it wants to delay an employee from taking new employment at a rival company. Usually, this is to protect your private information and the investment you made in that employee. If you have a certain employee or class of employees with access to proprietary information, a non-compete agreement is advisable.
What are the elements of a non-compete agreement?
A non-compete agreement must have specific parts to be enforceable. These requirements vary by jurisdiction, but a typical agreement should include the following:
Duration of non-compete
The duration typically ranges from between six months to two years, but may be even less. An employer is expected to base this duration on a reasonableness test. The length of the non-compete must be reasonable based on the information to be protected, the employee’s status in the company, and their compensation while employed. Long-term non-compete agreements are rarely enforceable in court.
Scope of the agreement
The contract should specify the type of work and employment prohibited by the agreement. It may not restrict all employment of any kind. It may specify certain employers, certain types of employment, or other limited scopes to which the agreement applies. An employee should be able to clearly understand what they are prohibited from doing. Ambiguity will likely result in an unenforceable contract.
The agreement should limit the non-compete to a geographical range in which the employer competes. The employee should not be prohibited from employment in an area where your company does no business.
Compensation or damages
The non-compete agreement will outline what damages or compensation is owed to the employer for violations of the contract. What violates the contract must be clear and the amount of damages must be clear and reasonable as well.
While a non-disclosure agreement may be its own separate contract, many non-compete agreements include provisions that prohibit the disclosure of certain information. This could include trade secrets, client lists, business contacts, and other protected information.
What are the imitations of a non-compete agreement?
Many non-compete agreements are struck down as unenforceable because they are over-broad. When considering the elements of the agreement, the employer should limit those provisions as much as possible to ensure they are enforceable. Reasonableness is key to enforcing this type of contract. The court will balance the needs of your company with the rights of your former employee. Courts look strictly upon these agreements, especially if they prohibit employment for a significant length of time.
Non-compete agreements are disfavored in some jurisdictions and are outright banned in others, such as California. Make sure your company knows whether such an agreement is enforceable in your jurisdiction and what limitations apply if your state allows these agreements.
How to create a non-compete agreement
You can create a non-compete agreement using template software. The form document should meet all of your basic needs and is usable for most employment situations. Once it is approved by your legal department, you can simply use it to complete fillable areas on the contract.
Digital contracting makes it easy to handle high-volume contracts and helps your human resources department properly handle employment agreements when taking on new employees. Whether you are having many employees sign a form agreement, or need to specially modify an agreement for a particular employee, your needs are met.
How to manage non-compete agreements
Companies that use non-compete agreements need to track when the agreement was signed, what version was signed, and when the effective date ends. The company must also manage all data related to the contract. This can be a daunting task with out-of-date systems or unsophisticated methods. Ironclad’s contract management software gives you usable contract data reporting to let you stay on top of high volumes of agreements.
You can manage contracts faster and even visualize contract processing with data reporting and easy-to-read visuals. The software can also help by storing data in a contract data repository, which allows you to access information such as:
- Start and end dates for the contract
- Terms and conditions
- Workflow suggestions
- Geographical limitations
- Party information
- Template and automation suggestions.
Why non-compete agreements can be time-consuming and hard to keep track of
They may start at the beginning of employment, but do not end until after the specific duration listed in the agreement. Contract management software can help identify key dates and provide automatic notifications about them. It also makes a specific employee’s agreement easy to identify and pull up for review in case of a dispute.
The Ironclad Workflow Designer hands you the keys to automate your contracts. Automation can streamline your contracting processes by 80% or more, letting you focus on revenue-generating goals rather than complex contract negotiations or tracking.
Why non-compete agreements are hard to manage
Too many companies still use antiquated methods for storing and analyzing their contracts. Especially with high-volume employment contracts such as these, automated software simplifies the process and gives you the tools needed to properly analyze and manage these documents.
Why use digital contract management for non-compete agreements?
Non-compete agreements are meant to protect your trade secrets and other proprietary information from your competitors, so enforceability is key. You can better protect your signed agreements with proper management to reduce this contract’s limitations
- Who uses non-compete agreements?
- What is the purpose of a non-compete agreement?
- When do I need a non-compete agreement?
- What are the elements of a non-compete agreement?
- What are the imitations of a non-compete agreement?
- How to create a non-compete agreement
- How to manage non-compete agreements
- Why use digital contract management for non-compete agreements?
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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.