What is a non-competition agreement?
A non-competition agreement is a legal agreement or a clause in a contract specifying that an employee must not compete with an employer after the end of the employment period. These agreements also prohibit the employee from revealing proprietary information or secrets to other parties during or after employment.
Many contracts specify a certain length of time that the employee is prohibited from working for a competitor after their employment ends. Employers may require employees to sign non-compete agreements to retain their place in the market. The people required to sign these agreements can be employees, contractors and consultants.
The validity and application of a non-competition clause vary by jurisdiction and may require the former employer to continue to pay the former employee base salary during the non-competition period.
Key points to remember
- A non-compete agreement legally obliges a current or former employee not to compete with an employer for a certain period of time after employment ends.
- Under such an agreement, the employee must not reveal any trade secrets learned during their employment.
- These contracts specify for how long the employee must refrain from working with a competitor, in a specific geographical area or in a specific market.
- Some states, such as California, refuse to enforce non-compete agreements.
- Non-compete agreements can prevent workers from getting jobs in their field if they leave a position.
Understanding Non-Compete Agreements
Non-competition agreements are signed at the beginning of the relationship between employer and employee. They give the employer control over the specific actions of the employee, even after the relationship ends.
These agreements have specific clauses stating that the employee will not work for a competitor after his employment ends, whether he is terminated or resigns. Sometimes employees are barred from working for a competitor even if the new job does not involve the disclosure of trade secrets.
Some contract terms may include how long the employee is bound by the non-compete agreement, the geographic location where the employee can work after employment, or the market in which they can work. compete” or a “restrictive covenant”.
Non-competition ensures that the employee will not use information acquired during employment to start a business and compete with the employer once the job is completed. It also allows the employer to retain its place in the market.
Non-competition should be designed to protect the best interests of both employer and employee.
Components of a non-compete agreement
Non-competition agreements are generally not standardized, but many contain similar restrictive elements. Some of the components you might see in a non-compete agreement are:
- Duration: Non-competition agreements cover specific timeframes, such as six months or one year. Long-term agreements are prohibitive for employees as they may prevent them from finding work after leaving an employer.
- Geography: Some agreements take geographical location into account, prohibiting an ex-employee from working in specific areas for a specific period of time.
- Scope: Non-compete agreements must specify the type of work or services that a former employee cannot provide. They should include company-specific or otherwise proprietary information, techniques, procedures, and practices.
- Competitors: Competition must be defined in the agreement. The company doesn’t need to list them all, but it should give a general idea of the industry and types of companies the employee agrees not to work at.
- damage: Employers define the damages they are entitled to if an employee violates the agreement.
When and why are non-competition agreements used?
Companies use non-competition agreements to protect their intellectual property, trade secrets, proprietary information, procedures used to produce their goods and services, or to maintain competitive advantage.
Without a contract in place regarding the release of information to competitors, many companies would lose their advantage. Former employees could legally use information they obtained at a company to help a new employer gain a benefit. Additionally, an ex-employee might be able to start their own business using information acquired from another company.
If this information is provided to competitors, a company can be forced out of the market and industry, making non-competition a critical part of the hiring process for many companies.
Industries that use non-competition agreements
Non-competition agreements are common in the media. For example, a TV station might have legitimate fears that a popular weather forecaster could siphon off viewers if they started working for a rival station in the same area. This would be considered reasonable cause to sign a non-compete agreement in most jurisdictions. Other industries where these agreements are commonly found include:
- Financial services
- Business Management
- Computer science
Non-compete agreements are enforced differently in many states. Therefore, it is best to consult an employment law attorney to learn about non-competition in your state.
Legalities of non-competition agreements
In the United States, the legal status of non-competition agreements falls under state jurisdiction. States vary widely in their application and recognition of non-competition agreements, and many state legislatures have updated legislation relating to non-competition agreements.
Non-competition agreements cannot be enforced in North Dakota and Oklahoma. California does not recognize non-compete agreements, and an employer who binds an employee to one after employment is terminated may be sued. Hawaii banned non-competition for high-tech companies in 2015. In 2016, Utah changed its law, limiting new non-compete agreements to only one year.
Most states adopt some sort of standard that a non-compete agreement must not be egregious in duration or geographic scope and must not significantly restrict a worker’s ability to find employment. However, jurisdictions differ widely in interpreting the terms of a non-competition agreement as being too demanding.
Non-compete or non-disclosure agreements
Non-competition agreements are distinct from non-disclosure agreements (NDA), which generally do not prevent an employee from working for a competitor.
Instead, NDAs prevent the employee from revealing information that the employer considers proprietary or confidential, such as customer lists, underlying technology, or information about products in development.
Advantages and disadvantages of non-competition agreements
Protect trade secrets and proprietary information
Can inspire more innovation from employees who sign them
Matching employers with employees looking for a long-term position
Reduce staff turnover
Weakening the bargaining power of employees
Significant waiting time before applying for another job in the same field
Can restrict employees without trade secrets
The benefits explained
- Protect Trade Secrets: These agreements can protect employers from employees moving to a competitor and sharing confidential information. That being said, agreements must be fair to both the employee who signs the agreement and the employer who issues it.
- Inspire more innovation: Non-competition agreements can prevent the spread of ideas and information, encouraging competitors to innovate to keep pace with other companies.
- Used for employee matching: A non-compete agreement can be used to match employers with employees who plan to stay in a job or be entrusted with valuable information.
- Reduce worker turnover or departure: Non-competitions can reduce employee turnover as they tend to restrict other employment opportunities. Additionally, uncompetitive companies may need to provide training and education to their employees to continue innovating, to the benefit of their careers and market value.
- Weakened bargaining power of employees: Workers are prohibited from seeking a better paid position or negotiating for more pay or benefits when under a non-competition clause.
- The wait time for a new job can be significant: Non-competition waiting periods can prevent departing employees from finding meaningful employment in their areas of expertise. Employees who sign non-compete agreements may leave their industry altogether if it is too difficult to find a new job after signing one.
- Few benefits: Non-competition usually only benefits the company, not bringing many benefits to employees.
- Can restrict employees without trade secrets: The U.S. Treasury Department’s Bureau of Economic Policy reported that less than half of workers subject to non-competition agreements have trade secrets. Unfortunately, this means that more than half of workers subject to non-competition agreements are unnecessarily restricted by these clauses, further hampering their ability to negotiate.
How long do most non-competitions last?
Typical non-competition periods are six months to a year, but can last longer. However, it is difficult for companies to legally enforce long-term non-competition agreements. Some states will not enforce these agreements, and a few do not recognize them as legal.
How to circumvent a non-competition agreement?
If you signed a non-compete clause and broke the agreement, you could, in theory, be sued. State laws (which differ) define whether non-compete agreements are enforceable (or not).
Is the non-competition really enforceable?
State laws differ on the legality and applicability of non-competition. Law firm Beck Reed Riden LLP surveyed states and compiled a list of their positions on non-compete agreements, protected interests, standards and exemptions.
Signing a non-compete agreement may not always be in your best interest, but it is usually in the best interest of your potential employer. It’s worth talking to an employment law attorney before signing one to get clarity on your state’s laws and to consider the possibility that you may have difficulty finding work in your field if you leave. your job.
Not all states honor non-compete agreements, but some do, so it’s worth knowing in advance how a non-compete agreement might unfold if you quit your job or break your agreement.