A valid non-compete agreement can be a powerful business tool. In today's competitive market, many companies -- Fortune 500s, sole proprietors, nonprofits and more -- use non-compete agreements to protect trade secrets and prevent the luring away of loyal customers.
However, enforcing non-compete agreements can be tricky, especially if they aren't clearly drafted.
To be legally valid, here's what a non-compete agreement has to entail:
1. It Must Be Supported by Consideration.
A binding contract requires consideration. That means the person signing the non-compete agreement needs to get something in return.
For a prospective employee, if the agreement is signed upon the acceptance of a job, then the job itself can be the benefit granted. But if it's a current employee being asked to sign a non-compete clause, then the employer can give a substantial perk -- like a bonus, a higher percentage of billings, etc. -- as consideration.
At the end of the day, you need to make it worthwhile for the employee to sign the non-compete agreement.
2. It Must Protect the Employer's Business Interests or Trade Secrets.
The non-compete agreement can't just serve any purpose to your liking. The non-compete restriction must protect an employer's legitimate and critical business interests or proprietary trade secrets.
In the case of a medical practice, for example, the business interest is that a doctor's patients may choose to follow him or her to a new practice, causing the medical practice financial harm.
3. It Must Be Realistic and Reasonable.
The terms of a non-compete agreement must be realistic and reasonable. They can't unduly burden the employee's ability to earn a living in her field.
As a general rule of thumb, the agreement's scope, duration and geographic area must be no larger than necessary to protect the employer's legitimate business interests. Remember, preventing honest competition is not a legitimate business interest.
A few other legal considerations: It's best to include a time limit on the restriction. Also, don't try to block the employee from working within a field, and don't keep an employee from taking a job in a geographical area that does not compete directly with the company.
If a court finds a non-compete to be too far reaching, it can narrow it to make it enforceable, or refuse to enforce it entirely.
Need More Help?
Because of the specifications required to create a valid and legally binding non-compete agreement, and the concern it can cause when an employee is asked to sign one, legal advice can be helpful when drafting or entering into such an agreement.
If you are struggling to craft a binding non-compete agreement, you may want to consult a contracts attorney in your area. A lawyer's expertise can help make sure that your non-compete agreements are both fair and enforceable.
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- Creating an Enforceable Noncompete Agreement (FindLaw)
- Does Your Startup Idea Violate Your Contract? (FindLaw's Free Enterprise)
- How to Protect Your Company Secrets (FindLaw's Free Enterprise)
- Preventing Defection: Confidentiality and the Non-Compete (FindLaw's Free Enterprise)