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Non-Compete Agreements – Everything you need to know

By Joanne Hue, Date published: 2022-03-22

What is a Non Compete Agreement?

Non-compete Agreement

A non-compete agreement is a legal agreement or clause in a contract specifying that after the employment is over, an employee must not enter into competition with the employer. These agreements prevent employees from disclosing proprietary information or trade secrets to any other parties during employment or even after the employment period is over.

The contracts usually mention a period of time during which the employee is barred from working with competitors after his employment is over. The employees may be required to sign these to maintain their business in the market. These agreements may be required to be signed by employees, contractors, and consultants.

The validity and enforcement of such clauses or agreements differ from jurisdiction. During the non-compete period, the former employer could be required to pay a base salary by the ex-employee. We can say that non-compete clauses or agreements legally bind current or former employees from competing with the employer for a certain period of time. Along with the period of time, such contracts also mention the geographic location or the market in which an employee is prohibited from competing with the employer.

Employee Non-Compete Agreement

These agreements are signed at the beginning of employment or when the relationship between employer and employee begins. Using such contracts, the specific actions of an employee are controlled by the employer. The specific clauses stated in these agreements could be: an employee will not work for a competitor after the employment is over, irrespective of whether they are terminated or resigned. Even if a new job doesn’t require disclosing trade secrets, the employees are still prevented from working for a competitor.

As mentioned above, these contracts may include the length of time the employee is bound to the non-compete agreement, the geographic location, and/or market. These agreements may also be called a “covenant not to compete” or a “restrictive covenant.”

The purpose of these agreements is to ensure that the employee will not use any of the information gained during employment either to start a business or to compete with the employer once the employment ends. This is also to ensure that the employer maintains its position in the market.

Industries That Use Non-Compete Agreements

These agreements are commonly used in the media industry. They are also common in the information technology (IT) sector, where employees are often charged with proprietary information that may be deemed valuable to a company. Other industries which use such agreements include the financial industry, the corporate world, and manufacturing.

Legalities of Non-Compete Agreements

The legal status of non-compete agreements varies from the jurisdiction. For example, in the USA, the legal status of non-compete agreements is a matter of state jurisdiction. California doesn’t recognize the non-compete agreements at all which means that any agreement by an employer which binds the employee after his employment is over can be sued. States vary widely in their enforcement and recognition of non-compete agreements, and many state legislatures have undertaken recent debates and updated legislation related to non-compete agreements.

Non-compete agreements cannot be enforced in North Dakota and Oklahoma. Non-compete agreements were banned by Hawaii in 2015, for high-tech companies. In 2016, Utah changed legislation, limiting new non-compete agreements to only a year.

Some sort of standards is adopted by the jurisdictions. So a non-compete agreement must not be egregious in the length of time or geographic scope and shouldn’t meaningfully restrict a worker’s ability to find employment. However, jurisdictions differ widely in interpreting what terms of a non-compete agreement would be overly onerous.

Non-Compete vs. Non-Disclosure Agreements

There is a distinction between non-compete agreements and non-disclosure agreements (NDAs). NDA’s generally don’t prevent an employee from working for a competitor. Instead, NDAs prevent the employee from disclosing information that the employer considers being proprietary or confidential to the competitor, such as client lists, underlying technology, or information about products in development.

Advantages and Disadvantages of Non-Compete Agreements

There are advantages and disadvantages of non-compete agreements for both employers and employees. Such agreements protect the employer from the competitor by preventing an employee from sharing proprietary information. The agreements should have a degree of fairness to both the employee signing the agreement and the employer who is issuing it.

A non-compete agreement may be daunting for the employees who, after leaving their industry entirely, find it too hard to get a new job after signing such agreements.

Pros: 

  • Protect trade secrets and proprietary information.
  • May inspire more innovation from employees who sign them.

Cons

  • Non-compete agreements weaken the bargaining power of employees.
  • Employees may have to wait a significant amount of time before getting a new job in their field.
  • Few social benefits at work for signing a non-compete agreement.

Conclusion

Entering into a non-compete agreement may be in the best interest of an employer. However, it may not always be in the best interest of the employee. An employee should consult an employment attorney before entering into such agreements and consider the future difficulties related to finding a new job in their field.

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