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What is a non-compete agreement?
A non-compete agreement is a formal workplace undertaking between the employer company and its employee, consultant, or contractor. It is an initial contract usually signed by employees while working with specific companies or businesses. It is standard practice for such a contract is executed at the commencement of an employment or contractual term.
A non-compete agreement is a signed undertaking or promise made by an employee not to enter into direct or indirect competition with its employer(s) for the entire employment term and for a specific timeframe after employment termination. The duration is mostly determined by the state legislature and typically range from 6 months to 2 or 3 years in employment scenarios.
This restriction also includes the particular industry or market and business territory from which the employee is barred from competing. Employers often require employers to sign a non-compete to retain a dominant market position, especially in corporate settings and the IT and financial services sectors.
As a restrictive covenant, a non-compete agreement often goes hand-in-hand with a non-solicitation and non-disclosure agreement as they often overlap. In addition to being prohibited from competing against its employer, the employee cannot reveal proprietary to third-parties or solicit the employer's clients or other employees.
What should be included in a non-compete agreement?
The components of a non-compete agreement vary between companies and businesses, industries, and jurisdictions.
However, a standard non-compete agreement document should include the following clauses or components, among others:
- Name of company or employer
- Name of employee, consultant, or contractor
- Company business
- Relationship acknowledgment
- Employee acknowledgment
- Non-competition terms (including duration, business territory, and market)
- Non-solicitation terms
- Governing law and jurisdiction
Is a non-compete agreement enforceable in court?
A non-compete agreement is a legally binding contract between the relevant parties. However, the enforceability of such agreements varies between jurisdictions. So non-competes have different scopes and requirements for enforceability in different territories and jurisdictions.
In the US, for instance, different states operate different degrees of enforceability. In some states like California, non-competes are illegal and have no legal effect. Although they can be used in places like Oklahoma and North Dakota, they cannot be enforced. Also, Hawaii hi-tech companies are banned from using non-competes while such agreements are only limited to 1 year in places like Utah.
If legally recognized under your legal jurisdiction, having a non-compete agreement grants you a certain amount of leverage over specific employment activities of past or present employees. These are activities that may fundamentally hurt your business growth or expansion or reduce market share if left uncontrolled.
It gives you legal protection against the use of your company's proprietary information or trade secrets by current and potential competing businesses. The last thing you need in competitive markets is a former employee entering into competition with you and possessing insider knowledge of your business differentiation and strategy. It also helps to reduce high employee turnover.
To be enforceable in courts, non-competes need to meet specific criteria:
- They must contain fair terms regarding the restriction on timeframe, geographic scope, and market. Broad and long-term non-competes are barely upheld in courts.
- They should be executed at the commencement of the employment contract or during the early days of employment.
- They should not be construed in a manner as to be onerous or limit the employee’s ability to gain meaningful employment or make a decent living.
- They should not be unreasonably lengthy and ambiguous as to misrepresent the terms of the agreement. The employee should be allowed to negotiate the agreement.
- They should follow applicable state laws and legal requirements.
- The applicable restrictions should be to protect the company’s legitimate business interests.
- In some cases, they should attract additional compensation in exchange for signing the non-compete. Employees that sign non-competes often gain increased negotiating power.
You may also want to consider relying on arbitration as the applicable dispute resolute mechanism. Though this is not a guarantee of enforcement in unfriendly jurisdictions, an arbitration clause will expressly contain the mandatory and applicable forum and exclusive governing law and state of jurisdiction. A well-drafted arbitration clause with express and defensible provisions for the choice of law and venue and emergency injunctive relief can be that much needed legal edge.
How do I write a non-compete agreement?
A non-compete agreement is a legal document that requires legal expertise in its drafting and execution. So writing it all by yourself can be quite a daunting task. Remember that you also need to study your market, major competitors, and business directly or indirectly competing with your business. And you need to anticipate any possible future conflict of interest and forestall the resulting business threats in the short term.
Instead of starting from scratch, our free non-compete template makes it easier to write your agreement. You can edit and customize our template to suit your specific business preferences and legal requirements.
At EasyLegalDocs, you can download and edit our free and easy template in Microsoft Word (.doc), Adobe (.pdf), and Google Docs account. You can also print an online copy from your browser. All you have to do is answer just a few simple questions, and we will generate your non-compete agreement in minutes.