In today’s business environment, staying with one employer for an extended period of time has become a rarity. Employees tend to move on to new pursuits and positions after several years, leaving businesses to search for new qualified applicants who can quickly learn what was lost and maintain the institutional knowledge and business relationships of the employer. In addition to the constant cycle of employment, these businesses also face the challenge of protecting their trade secrets and unique knowledge when an employee moves on, and making sure that their business interests and customer relationships are not lost. In order to do so, many businesses utilize non-compete agreements.
What Are Non-Competition Agreements?
Non-competition, or non-compete, agreements are legally binding agreements signed between an employee and an employer under which the employee agrees not to act as competition to his or her former employer for a certain period of time after leaving a position. This can take many forms. The employee may agree not to work for certain employers who are in direct competition with the former employer, or not to reveal certain confidential information learned from the former employer. Non-compete agreements may also prohibit employees from taking clients or customers with them when they leave. The main idea is to protect the employer from additional harm as a result of the employee’s departure.
Elements of a Non-Competition Agreement
Since non-competition agreements act to limit the freedom and rights of an employee, they are often strictly scrutinized by the courts. In order to be legally valid and enforceable, non-competition agreements must meet certain requirements. First and foremost, like most business agreements, it is important that the non-competition agreement be in writing and signed by both parties. Second, since the agreement is a contract, it cannot bind one party without that party receiving something of benefit in exchange for what it has given up. This is called consideration. Often, since a non-competition agreement is a part of a job offer, the employee’s consideration is deemed to be the job itself. However, this is not always the case, and a valid non-competition agreement signed at a later date may require the employee to receive an additional benefit, such as a bonus.
A valid non-competition agreement can only protect a legitimate business interest of an employer. Thus, an employer cannot create an agreement covering all possible aspects of the employer’s business. Instead, the employer must be seeking to protect confidential information, trade secrets, or the benefit of customer relations developed over time. In any of these circumstances, the employer must be able to show that the information or elements it is seeking to protect give the employer a competitive advantage that the former employee should not be able to later utilize.
Finally, in order to be valid a non-competition agreement must be reasonable in scope, geography, and time. While there is no one universal standard for the acceptable length or breadth of a non-competition agreement, generally the requirements must be considered in light of the information being protected and the service the employer provides. Thus, if the information is expected to become outdated after several years, it would be unreasonable for the non-competition agreement to extend for two decades. Likewise, if the employer only serves customers in one state, it would likely not be valid for the employer to restrict the employee from certain work in any state in the country.
Since these requirements are complex, if you are considering implementing non-competition agreements in your business and hiring paperwork, it is important to consult with a qualified corporate law or employment law attorney who is knowledgeable in such agreements. He or she will help to ensure that you craft an agreement that will be valid and enforceable in a court of law, should the assistance of the court become necessary at a later date.