Companies grow by investing time and money in various resources, including their employees. Yet business owners are often anxious about losing their investment. Once confidential information is shared, there is a risk that an employee will leak the company’s secrets to a competitor, or quit and create a competing business using the confidential information. To help protect against this, many companies have employees sign a non-compete agreement when they are hired.
A non-compete agreement is a contract between an employer and employee that sets limitations on the employee’s ability to work in the same field or industry as the employer after the employee leaves the company. Usually, the agreement prohibits the employee from working for a business that competes directly with the employer in a particular geographic area for a specified amount of time. Here are a few key points typically found in non-compete agreements:
- Duration and geographical restrictions.
Non-compete agreements must describe in detail how long the restrictions will be enforced and the specific geographic area where the employee will be restricted from competing with their former employer. A typical agreement is effective for six months to three years following termination of employment. The employer must be reasonable in setting the duration, as it cannot inhibit the employee’s ability to find work or advance the employee’s career. The geographic restrictions must also be reasonable. For some industries, limiting the geographic restriction to a particular city or region of town is appropriate; for niche businesses, a broader geographic restriction may be necessary. State laws vary as to what duration and geographic restriction is reasonable. It is important to research your state’s laws and consult a business attorney before asking an employee to sign an agreement that a court could potentially find unenforceable.
The agreement must detail the nature of the employee’s work. However, the scope must not be so broad that the employee cannot find work in the future. The agreement often specifies the employer’s competitors, if not by name, by the type of business that an employee is prevented from seeking employment with. Specifying the work, activities, services, and products that the employee is prevented from engaging in or offering after termination of employment prevents grey areas in the event it becomes necessary to enforce the agreement. It also helps the employee know what work the employee can and cannot engage in after employment.
- Confidential information and trade secrets.
Every business has unique information that it has developed and relies on to attract customers, sell products or services, and succeed in the market. The agreement should detail the types of information covered by the agreement. In addition, the agreement should specify that the employee is prevented from disclosing trade secrets, intellectual property, confidential information, client lists, and customer relationships. Additionally, the employer should require that the employee return all sensitive information and company materials to the employer upon termination of the employment.
- Consideration and penalties.
Before giving up the right to compete, the employee must be given something in return. In the law, this is called consideration. If the employee has not yet been hired, the consideration might be the employment itself. If, however, the employee has already been hired, the employer must offer something new to the employee as consideration for the non-compete, such as a promotion, raise, or other benefits. In addition to including the consideration in the agreement, any penalties or money damages for breaking the agreement should also be specified.
While this list is not everything, it covers the basic elements of non-compete agreements. Some states strictly enforce non-compete agreements, while others only enforce them if they are reasonable in scope and length. A few states refuse to enforce any non-compete agreement. Since the laws regarding enforceability of non-compete agreements vary by state, you should seek the expertise of an employment law attorney if you are considering drafting and implementing one. Please call our office today at (402) 979-607 to set up a consultation so we can discuss the best ways to protect your business and legacy!