What You Need to Know About Making a Non-Compete Agreement
A non-compete agreement is essential for many employers to protect their respective interests as a corporation. Here’s what employers and employees need to know about non-compete agreements, why they are important, and what they can do to maximize their interests.
What is a non-compete agreement?
A non-compete agreement prohibits someone from working in the same business or line of work for a specific period and geographical area. One commonly uses a non-compete for employment purposes. An agreement needs to comply with State Laws.
Some employers may require new employees to enter into non-competition agreements before beginning work, and those agreements take effect after the employee leaves.
Employers may require non-competition agreements for the protection of trade secrets or goodwill.
Related: Non-Compete Laws By State
What makes a non-competition agreement valid?
A non-competition agreement must
- Be supported by consideration at the time it is signed
- Protect a legitimate business interest of the employer
- Be reasonable in scope, geography, and time
What is Consideration?
Non-competition agreements need to be supported by consideration, meaning the employee must receive something of value in exchange for the promise to refrain from competition. If an employee signs a non-competition agreement before beginning employment, the employment itself will be sufficient consideration for the promise not to compete.
However, if an employee signs a non-competition agreement after beginning employment, the promise of continued employment will not be considered valid consideration for the promise. In this case, the employee must receive something else that is of value to them in exchange. For example, this may be a promotion or additional benefit not part of the original employment agreement.
What is Protection of Legitimate Business Interests?
An employer may use a non-competition agreement to prevent a former employee from capitalizing on the employer’s goodwill with customers, thus preventing the former employee from competing with the original employer. An employer may also use a non-competition agreement to protect its confidential information.
Why is Reasonableness Important?
In deciding whether to enforce a non-competition agreement, the court will balance the need to protect the employer’s legitimate business interests with any burden that such enforcement would place on the employee.
Related: What Is an Employee Non-Compete Agreement in California?
Non-competition agreements must be reasonable in duration and scope. The reasonableness of the duration of the agreement will depend on the specific facts of each case, but it is often a period between six months and two years.
The geographical area covered by the agreement must also be reasonable. This will depend greatly on the services provided by the employee and the importance of the services to the employer’s business. Generally, courts will not allow a non-competition agreement to prevent an employee from working in a geographical area where the employer does not do business.
Should the parties hire a lawyer?
Because entering into a non-competition agreement requires balancing the interests of both the employer and the employee, it may be best to seek the advice of an attorney before signing to ensure fairness and optimal outcomes for both parties.
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