THE INS AND OUTS OF NON-COMPETE AGREEMENTS

 

While terminating an employee’s contract is never fun, it’s typically not too much of headache, so long as you have the proper safeguards in place. Non-compete agreements are a precaution many business owners put in place in order to protect their company from potential threats.

 

What is a non-compete agreement?

A non-compete agreement is a legally-binding agreement between an employer and an employee that prohibits the employee from either entering into employment with another competitor or using specific information that was learned during the time of employment to enter into employment with another competitor.

Typically, non-compete agreements state that the employee cannot join a profession that is considered to be a competitor of the present employer for a certain amount of time and/or in a specific geographic region.

 

Why do businesses use non-compete agreements?

Many businesses utilize non-compete agreements in order to prevent a previous employee from working for a competitor or starting their own business in the same industry. Non-compete agreements are an effective way to keep ex-employees from using knowledge gained on the job to enter into employment with other competing businesses. The potentially devastating effects of an ex-employee sharing information about a businesses’ customers, marketing plans, pricing strategy, salaries, or trade secrets with a competitor is the main reason why many employers include a non-compete clause in their employment contracts.

Employers can also pair a non-compete clause or agreement with a severance agreement. A severance agreement is an agreement between an employer and employee that requires an employer to compensate an employee for his or her separation from the company. It often includes a stipulation that states the employee cannot sue the employer for termination. When an employee signs a severance agreement, they may also be required to sign a non-compete agreement.

 

What components should I include in my non-compete agreement?

Drafting a valid, enforceable non-compete agreement can be tricky; just one poorly written provision in an employment contract can render a non-compete clause void. If you ever have to take a former employee to court for violating the terms of a non-compete agreement, you want to make sure it can hold its weight against the scrutiny of the courts. Here are some important components to think about when drafting a non-compete clause to ensure its both realistic and enforceable.

Duration

In order for a non-compete agreement to be enforceable, a reasonable time frame for which the agreement is valid through must be included. Keep in mind that what the court considers “reasonable” will vary state-to-state.

 

Jurisdiction

Whether or not your non-compete agreement is enforceable will mainly depend upon state laws. Before you start drafting, do some research on how non-compete agreements are valid in your state. There are many states, including Colorado, where non-compete agreements are unenforceable. In such states, non-compete agreements function more like a non-solicit agreement. A non-solicit agreement is less prohibitive and focuses on preventing a former employee from approaching his or her former employer’s clients.

 

Consistency

If you enforce one contract, make sure you’re enforcing all others, too. If one employee violates the terms of your non-compete agreement and you do nothing while another employee violates the same agreement and you choose to sue, you’re likely going to run into problems proving the validity of your business interest in court.

 

Compensation

If you’re including a non-compete clause in your employment contract, you must compensate your employee for relinquishing their right to compete in the market. This is typically done by offering them something of value, which can often be the employment itself. However, certain states require businesses to offer up something of financial value, like a raise or extra PTO.

 

Non-compete agreements can be tricky to navigate but are a great asset to include in an employment agreement. If you need help drafting your non-compete agreement, get in touch with us.