If you want to prevent your top employees from working for your competitors after employment ends, a non-compete agreement might help limit the possibilities—depending on in which states those employees live and work. But what is a non-compete agreement, exactly?
Non-compete agreements can be standalone agreements or part of a broad employment contract. They bind a current or former employee, contractor, or consultant from competing with an employer, whether on their own or at another company, for a certain period of time after employment ends. They can also include non-disclosure provisions, which prohibit the employee from revealing confidential company information to other parties.
Here’s an overview of what you need to know about non-compete agreements.
What is the purpose of a non-compete agreement?
Non-compete agreements are common in industries like manufacturing, corporate management, finance, media, and technology. These agreements legally bind current or former employees, contractors, and consultants from competing with their employer after employment ends. The agreements may include geographic or specific market limitations, as well as a specific period of time the agreement is in effect.
Employers like non-compete agreements because they can protect confidential company information like trade secrets and client lists, and maintain a competitive edge in the market. The current or former employee is prohibited from using the information they learned at one company to enrich themselves or another company. It also reduces employee turnover and encourages long-term employment relationships.
Employees, on the other hand, may find themselves pushed out of the market after signing a non-compete agreement. While employers have to offer valuable consideration in exchange for the employee agreeing to the terms, employees generally benefit far less than employers. It weakens their bargaining power and forces them to wait a long time—or move away from a certain location—before they can get another job in the same field.
How does a non-compete clause work?
Non-compete clauses typically have a few common provisions, depending on which jurisdiction you’re in. These include:
- Specific time period: Generally, your agreement cannot continue indefinitely—that could unnecessarily prevent a worker from getting another job elsewhere. The agreement must have a reasonable time frame, which varies by state and by the specific facts of the case. Depending on your industry and location, the definition of a “reasonable” time period may vary.
- Geographic restrictions: Some non-compete agreements include geographic restrictions. This is common in industries like media, where companies want to prevent specific talent, like radio broadcasters, from going to work for a competitor in the same market. Again, this generally cannot be an indefinite restriction.
- Definition of competition: A good non-compete agreement should include a definition of what “competition” entails. This could be specific industries, businesses, job positions, or other competition for your company. The list doesn’t need to be exhaustive, but the description should be thorough enough that there is no room for misunderstandings.
- Scope of the agreement: You’ll also need to specify the type of work, services, or information the employee is bound from pursuing or sharing with others. This might include proprietary services, techniques, practices, and other confidential company information.
- Penalties: Finally, you should define what the penalties are if the employee breaches the agreement after signing. This typically includes financial damages.
Are non-competes enforceable?
Currently, non-competes are enforceable in most states—but they may be banned nationwide if the Federal Trade Commission’s (“FTC”) proposed ban goes into effect. On January 5, 2023, the FTC proposed a new rule which would void existing non-competes and prohibit any new agreements. Under the proposed rule, employers would need to rescind existing non-compete agreements and “actively inform workers” that their agreements are no longer in effect—including ex-employees who would still be subject to a non-compete signed while they worked for the employer.
Some states, like California, have banned non-compete agreements. Others, like Minnesota, are joining that group and have passed legislation banning non-competes. If you intend to ask an employee to sign a non-compete agreement, you need to make sure that it’s enforceable in your state.
How to create a non-compete agreement
In order to create an enforceable non-compete agreement, you’ll need to research employment laws for the state in which the employee lives and works, then draft the agreement from scratch. While one-size-fits-all online templates can be tempting to use, there’s no guarantee that they’ll be enforceable in your state.
Instead of doing the hard work yourself, let SixFifty help. Our Employment Docs platform is designed to guide employers through every stage of employment, from offer letters and non-compete agreements to termination and offboarding. You can generate top-tier employment documents like compliant non-compete agreements in a cost-effective, time-efficient manner. Best of all, our team keeps a close eye on changes to employment legislation across the country, which ensures that your documents will be current whenever you create them. No need to ask “what is a non-compete agreement?” when you can draft your own compliant and enforceable agreement today.
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