When you find a new job, you must sign a contract before you officially start working. The contract covers the terms of the employment, including issues like salary along with the duties and responsibilities. However, the employer may also need you to sign a non compete agreement. If you didn't sign such an agreement when you started working, you might notice that your employer pressures you to sign the agreement when you are being promoted or getting a pay raise.
Signing the non compete agreement is beneficial for employers as it helps them protect their businesses as it bars employees from starting a similar business. All types of businesses can benefit. So what is a non compete agreement? This content highlights what this agreement is, whether there is a need for signing it and things you should know before signing it.
What Is a Non Compete Agreement?
A non compete agreement is a contract between an employer and an employee that prohibits the employee from engaging in a business that competes with the employer's business for a certain time period and within a certain locality, which is specified in the agreement. Even though the employer cannot force you to sign it, they may terminate or not hire you if you refuse to sign the contract. Note: courts are not usually supportive of non compete agreements; they will consider factors pertinent to the case to determine whether this kind of an agreement is reasonable.
Therefore, if you are negotiating a non compete agreement with your employer, we recommend you to ensure that it is limited only to aspects necessary for the employer’s protection. You should also ask for severance payment when terminated under such circumstances. The non compete agreement, which is a protective mechanism for the employer from the undue competition by an employee, can also be referred to as a "restrictive covenant" or a "covenant not to compete." The contract is common these days when applying for jobs and in contracts involving the sale of businesses.
The main purpose of the contract is to restrict the ability of employees to go into a business similar to the employer’s within a specific locality for a certain time period. If you sign it, you agree that you won’t compete with your employer by engaging in any business similar to that of your employer, as an independent contractor, employee, significant investor, part owner or whatever other forms of competition your employer identifies and includes in the contract.
Non Compete Agreement Elements
The contract is typically state-governed and does not fall in the federal law jurisdiction. The non compete agreement covers these elements:
- The traditional "covenant not to compete" prohibits the employee from joining a competing businesses during a certain period and within a specific geographical location.
- Non-solicitation agreements bar approaching clients, poaching employees or wooing former employer’s supplies.
- A confidentiality agreement, also known as a nondisclosure, bars the use or revelation of information of former employers to new employers. The information could include client lists, marketing plans and product formulations.
Is There a Need for Non Compete Agreements?
The non compete agreement will legally bind employers and employees. It is important as it prevents the employee from competing with his or her employer after he or she is terminated, for a specified period in a certain locality. Employers benefit from the contract since it discourages an employee from leaving the current position held in the company or business and taking a new position, which presumably pays better, in a competitor's firm. Once the employee joins the competitor firm, he or she can pass on valuable information gained while working for the previous employer. This information can be used to gain a competitive advantage, which is deemed unfair.
As such, by making sure that the employee signs the agreement, an employer protects the company’s goodwill and trade secrets. It is also a viable strategy to retain talented and experienced employees from making a move to competitor firms. This allows the employer to benefit longer from its investment in providing a valuable training to staff. However, the agreement cannot include limitations on the employee’s right to earn a living and move on when he or she leaves the current employer.
Employers not using the non compete agreements should consider doing so. There are many benefits of ensuring that the employees sign the agreement. It is free and easily available to download off the internet. However, there are some demerits associated with the agreement since research has established that the non compete agreement can limit job mobility, discourage venture-capital investments and accelerate talent flight.
Provide Information on Non Compete Agreements
What Should Be Included
For the agreement to be legally valid, it should:
- Have an intention to protect a legitimate business interest, such as trade secrets or retaining valuable customers
- Be reasonable regarding its time, scope and geographical restriction
- Be supported by consideration, such as money
5 Things Courts Look For To Establish The Reasonability Of The Agreement
The court establishes the reasonability of the contract based on the following points:
- The potential harm to the employers. The agreement should establish the potential harm to the employer's business.
- The specified time period. The reasonability depends on the nature of the job. For instance, a manufacturing business can have a period of about a year. For yoga instructors, it can be three to six months.
- The banned territory. This may be as far as ten miles away from the previous employer for a hair salon but a three-state area could be reasonable for a business or sales manager.
- Impact on the employee. Signing the agreement doesn’t mean that the employer will not work for the remainder of his or her life. It is not reasonable for the employer to deprive the employee of making a living or forcing a relocation. Courts typically consider this point more than the others.
- Interests of the general public. The contracts should not stifle competition to the point of creating a monopoly.
Courts do not honor provisions that are deemed as unreasonable, a point that is established when negotiating for such contracts. This again depends on the state in question and the court used for such proceedings.
Employers should first focus on what they need to accomplish. If the employer is the owner of a local small business, you might ask where the contract came from. If it was downloaded from the internet, it is likely to include inapplicable clauses so it is best that you discuss point by point in the spirit that the resulting clauses will benefit you and doesn’t comprise excess baggage. This means that the parties involved should know the benefits and demerits.
The agreement binds both parties. As an employee, you need to ask for assurance in the contract that as you gain experience, you will receive promotions and pay raises so you are not stuck at your entry-level salary as the contract can trap you. Even if your employer is a large corporation, you’re entitled to negotiation. If the employer is not willing to negotiate, you’re free to walk away.
Always consult a lawyer to look into the contract document so that if there are any issues that are not in your favor, he or she can explain them to you and offer advice. You might also want to consult a lawyer if the employer wants you to sign the agreement as a condition for getting severance when being terminated. The situation is even more delicate when being offered a promotion or pay raise. Some states may require an add-on, such as more vacation when signing the contract if you're getting this raise or promotion.
You need to watch out for lawyer fees since some contracts stipulate that the employees pay for the legal fees of the company. Note that how the employer negotiates with you before signing the agreement can be an indicator of how you’ll be treated when employed. Therefore, you might be wary of employers who include too many clauses in the agreement that don't favor you as an employee.
A non compete agreement prohibits employees from engaging in a business that competes with his or her current or former boss’s business. For the contract to be valid, it must protect a legitimate business interest, such as trade secrets. It should also be reasonable regarding its time, scope and geographical restriction and must be supported by consideration, such as money. Again, both parties have to sign it for a court to recognize it. The non compete agreement falls under state jurisdiction.
You should note that the employer cannot force you to sign the non compete agreement but may terminate or not hire you if you refuse to sign it. It's mainly intended to restrict the ability of employees to go into a business similar to the employer’s within a specific locality for a certain period.
It is vital for employers since it discourages an employee from leaving the current position and helps protect the company’s goodwill and trade secrets. Some employers may use it as a strategy to keep talented and experienced employees from making a move to the competitor firm.
For employees: before signing the contract, always consult a lawyer to look into the contract and provide advice. We hope this article has adequately addressed what a non compete agreement is and whether there is a need for signing it.