What Is a Non-Compete Agreement?
Non-compete agreements outline an employee’s obligation not to compete with their employer for a specific time after the employer/employee relationship terminates. From an employer’s point of view, they can seem like a great idea, and they reduce the likelihood an employee will join your field of competitors. Some businesses approach the non-compete with a broad brush and have every employee sign a boilerplate non-compete agreement. What could go wrong? To answer that question, we have to dig deeper.
Non-Compete Agreements Explained
Most non-compete agreements include provisions that prevent the employee from taking a position with a competitor, opening a business that competes with the employer, developing products or launching services that compete, and, sometimes, prohibitions on recruiting former colleagues and soliciting customers. The intent is to protect the business from unfair competition that uses the business’s assets.
Non-compete agreements benefit employers, but there are few benefits to employees, except they are often necessary for employment.
Non-compete agreements can be difficult to enforce. If your industry does not have a lot of proprietary information or processes, there is little risk for an employee working with a competitor. While retail may be the same from one brand to another, IT, manufacturing, and research fields often have proprietary information.
Non-compete agreements offer significant benefits to the company and little rewards to current and former employees. Because they are one-sided to the advantage of the employer, non-compete agreements are highly regulated on federal, state, and local levels. The regulations vary widely, with some states seeing non-compete agreements as enforceable only under the narrowest circumstances.
You can avoid non-compete agreement pitfalls if the agreements are essential to protect your information assets and your business. Avoid drafting overly broad non-compete agreements, and take the time to determine what is vital to protect the business’s proprietary and confidential business information. You want to protect trade secrets, proprietary processes, key customers, and vendors.
Ensure that the time limit is reasonable. The landscape in business is constantly changing. Expecting a former employee to not work for several years is unreasonable; by that time, the proprietary information would have changed. Ensure that the geographic limitations are reasonable and match your market. If you have a regional market, your interests may be protected if your former employee seeks employment in a different region.
When competition would create serious business harm, sweetening the agreement with “consideration” or incentive is a good practice. Monetary compensation, stock options, or other incentives that recognize the value of the former employee’s adherence to non-compete agreements increases the likelihood that the agreement will not be challenged and your interests will be protected.
The best non-competes are employees and roles specific to your business. Not all employees have access to proprietary information that would damage the business. Focusing on key roles strengthens your non-compete agreements, and broad-brush overly restrictive contracts are often not enforceable. They also adversely impact employee movement and limit their options to change jobs which can be detrimental to their livelihood.
In 2021, President Biden signed an Executive Order on Promoting Competition in the American Economy. In that order, the President requested that the FTC set limits on non-compete agreements. Many states have limited or restricted the use of non-compete clauses. A few states do not recognize them; others have requirements around communication and limits around length, the salary level for employees required to sign non-compete clauses, and strict limits on what information they protect.
Reviewing your use of non-compete agreements with experienced professionals is a good idea. And like most employee practices, good communication and solid relationships with employees are your best course of action to protect your business.
Contact Us Today
The regulatory landscape around non-compete agreements is complex and varies by location. TANDIUM Corporation can help you design a program that protects your proprietary business information while staying in compliance with federal, state, and local requirements.
TANDIUM Corporation specializes in serving the Human Resources, Payroll, and Benefits needs of businesses and non-profit organizations. Contact us today to schedule a free initial consultation.