Employers often make their employees sign a non-compete agreement as part of their employment terms. In fact, using a non-compete agreement is a fairly common practice if the employee will have access to sensitive or confidential business information while working on the job.
You cannot force your employees to continue working for you, of course. But can use these agreements to prohibit a former employee from working for a rival company to safeguard your sensitive assets for a designated period of time.
In this guide, we’ll dig deeper into non-compete agreements to give you a better understanding of how they work.
What Is a Non-Compete Agreement?
Non-compete agreements are binding contracts that forbid an employee from working or becoming a part of their employer’s competitors for a defined period of time after they leave the current employer.
This can include working for a competitor in the same market or launching their own business in the same field. Employers may also bar the employee from recruiting the company’s workers to leave with them.
And they’re not just for employees–even independent contractors and consultants who terminate their relationship with companies can also be subject to non-compete clauses.
A non-compete agreement is an employer’s safety net. This allows them to avoid immediate competition after separating from an individual and protect themselves against the employee revealing company secrets and/or sensitive information.
The Basics of a Non-Compete Agreement
Below is a breakdown of the different elements of a non-compete agreement. Let’s take a quick look.
A Contract That Requires Cooperation From Both Sides
A non-compete agreement is actually a contract in which an employee has to give up a right they would otherwise have. They agree to not engage in competitive business activities during or after their employment relationship gets terminated with the company.
Naturally, they should receive something in exchange for this promise.
As an employer, you can make a job offer contingent on signing the non-compete. However, if you’ve already employed someone, you can give them some additional benefit—something like a promotion or a raise.
Including Specific Non-Compete Agreement Details
A non-compete agreement should include the following details:
- Dates. You must specify the effective dates, as well as the overall contract duration, for the agreement.
- Nature of the Agreement. It’s crucial to include the reasons for the noncompete agreement. After all, the contract will prohibit an individual from working for a company they may like. For example, the agreement can state the employee cannot release proprietary information that could potentially hurt the business.
- List of Inclusions. You must specify the scope of the non-compete agreement or what it intends. This is where you mention whether you want to stop former employees from entering into contracts with your competitors or starting a business in the same marketplace as yours.
- Purchase Option. You can choose to offer a buyout clause in the agreement. In such cases, the non-compete agreement should specify the amount the employer will have to pay to get out of the clause.
The above are a few basic yet crucial details every non-compete agreement must include. You can, of course, add more relevant information based on your requirements and the nature of the business.
Determining Agreement Effectiveness
Both parties—the employer and the employee—will have to sign the non-compete agreement. However, the documents don’t have to be notarized.
If legally enforceable by the state, non-compete agreements can help protect the interests of the business subject to terms and conditions, namely the reasonability and restrictiveness of the agreement.
In terms of agreement restrictedness, courts consider specific factors such as the geographical reach of the non-compete, the commercial reach (i.e, if the business is limited to a narrow market or captures a board industry), the legitimacy of the employer’s business interest, and the contract duration.
Let me explain this with the help of examples.
Suppose a technology company that provides a digital writing assistant tool makes its employees sign a non-compete agreement. Here’s what a court will consider too restrictive and reasonable:
- Too Restrictive: The non-compete restricts the employee from working for any other technology company in the United States for a decade.
- Reasonable Restriction: The non-compete restricts the employee from working for a rival company that also creates a digital writing assistance tool in the same state for six months or creating a competing digital writing assistance tool.
Understanding Agreement Enforcement Limitations
Employees often challenge non-compete agreements in court, making them harder to enforce. Plus, some state laws can make it harder to uphold non-compete agreements.
It’s why you should go through your state laws and public policy carefully, and consider other protective measures like a proprietary information and inventions assignment (PIIA) agreement before drafting your non-compete.
Typically, the employer is responsible for drawing up a non-compete agreement and a PIIA. This is then signed by the employee before they start working, so they are aware of what’s expected of them once they leave the company. In case the departing employee violates an impossible non-compete agreement, the employer can seek litigation against them.
But here’s the catch: Not all states enforce non-competes in the same way.
North Dakota and Oklahoma, among a few other states, make non-compete agreements unenforceable. California takes this a step further. Not only are non-competes unenforceable in the state, but an employer who requires employees to sign one can also be sued—even if they don’t plan on enforcing the agreement.
So make sure you check state laws first before drafting and signing a non-compete.
5 Non-Compete Agreement Templates You Can Use
At this stage, you know the main elements of a non-compete agreement. To get you started with yours, here are five free online agreement templates you can use.
Business in a Box
Being a business management toolkit, Business in a Box offers several online templates—non-compete agreements being one of them.
To access the templates, however, you’ll have to create a free profile to customize and download contract templates for your business. In addition to a general non-compete, this site also offers templates for other types of agreements of a similar nature, such as a non-disclosure agreement, a restrictive covenant for employment agreements, a non-disturbance agreement, and so on.
Wonder.Legal
Wonder.Legal allows users to create customized legal documents completely free of cost.
Before creating a non-compete for your business, you’ll have to fill out a questionnaire, after which the document will be generated one section at a time as you customize it. Once this is done, you can download the agreement in Word or PDF format and modify and use it as required.
FormPrintr
You can use FormPrintr to create free non-compete agreements according to the state you operate. The document is printable and can be exported as either a PDF or a Word file.
This online template site also provides you unlimited updates and copies of your non-compete agreement, as well as several other legal documents.
Betterteam
Betterteam provides a free downloadable non-compete agreement template to all users.
This template clearly outlines the general information you would need to include in your agreement, along with an overview of the steps involved in developing the contract. This includes studying your competition, writing the agreement, seeking legal review, and finally, signing the agreement.
FormSwift
FormSwift offers state-specific non-compete agreement templates similar to FormPrintr. Each of these agreement templates is free for download and can be downloaded as Word or PDF files.
The website also offers a sample non-compete agreement with examples for every step. This can be particularly helpful for users who are new to non-competes.
Having an online template that can be customized to suit your requirements is definitely convenient. Still, you should have an attorney review it before any employee signs it. After all, better safe than sorry.
3 Tricks for Drafting Enforceable Non-Compete Agreements
One of the most common problems with non-compete agreements is that they are sometimes unenforceable. Keep the following factors in mind to avoid encountering this problem:
Hire an Attorney to Verify State Laws and Agreement Eligibility
As mentioned before, non-competes are very state-specific. You have to be thoroughly informed about all the laws that will govern your non-compete agreement to avoid penalties and falling in trouble with the law. It’s why consulting an attorney before having any employee sign the agreement is so important.
This is especially applicable for remote work courses. You can have employees working around the world, making it crucial for you to know the law of the state where they reside. Remember, the state where your employee works from will govern the non-compete and not the state where your company is located.
Use Industry, Business, and Employee-Specific Parameters for Drafting
You have to prove the existence of special facts over and above the ordinary competition if you want to enforce your non-compete agreement. And the best way to do this is by having an agreement that‘s specific to your business, industry, and employee.
You see, trying to restrain ordinary competition is useless. A former employee can give ordinary competition by simply being intelligent, personable, and hard-working in his new job. But when you equip them with special facts, it’ll give them an unfair advantage when competing with your company.
That’s your loophole.
These special facts can include the following:
- If you provide your employee with specialized training or impart a unique knowledge or skill through the training. If that’s the case, you can easily enforce your non-compete by preventing the employee from leveraging this training against you in a new job. Moreover, this specialized training need not be an actual training course—it can be on-the-job training as well.
- When the employee becomes the face of your company to customers. Employees may think the company’s customers are their customers simply because they are the main contact between the customer and the company. However, an individual has to actually buy a product or service in order to become a customer. Precisely why, as an employer, you have an upper hand in this situation.
- If the employee has access to trade or business secrets or other confidential information.
You have a legitimate (and implied) business interest in keeping your former employees from using your trade or business secrets—or any other confidential information for that matter—in competition against you. Your employees will have to sign a confidentiality agreement in such cases, as well as a non-compete.
Only Include Reasonable Restrictions
I’ve discussed this before, and I’ll mention it again: You must avoid excessive restrictions in your non-compete to make it enforceable.
Don’t give in to the temptation to be heavy-handed when deciding your agreement provisions. While you can reasonably demand a longer duration of three to five years for high-level employees (CEOs, CFOs, and so on), it’s best to stick to one or two years for low-level employees. Furthermore, when you seek to restrict the distance in which a former employee conducts business, you cannot have an area larger than the area you ordinarily conduct a business.
A court can modify an unreasonable term or terms of a non-compete. But they may very well invalidate an entire agreement if the judge finds credible evidence you included overly broad language deliberately, deeming the non-compete agreement unreasonable and oppressive.
What to Do Next
I hope this guide gave you a better understanding of non-compete agreements and how they work.
Your employees are your most important assets. A high employee turnover rate indicates a bad picture, which can create a lot of hurdles in the long run. Do your best to motivate your employees and boost their morale to establish loyalty.
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