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Start Your Business Startup Basics

What is a Non-Compete Agreement?

What is a Non-Compete Agreement? Credit: Lichtmeister | Shutterstock

Businesses invest a lot in their employees. That includes everything from training and time to money and trust. In order to protect that investment, many organizations utilize a non-compete agreement, also known as a non-compete clause, as part of their hiring practices.

In its simplest terms, a non-compete agreement is a legal document that restricts an employee from going to work for an organization's competitor for a set period of time in a certain geographical area after leaving the business. The timeframe for a non-compete clause can vary greatly, from six months to five years or longer. The goal is to ensure employers don't invest time and money training and molding an employee, only to have them transfer those skills to a direct competitor. 

Depending on how they're written, non-compete agreements go further than guarding against a former employee working for a competitor. They can also provide protection against employees sharing any trade secrets — ideas, software, formulas, process, client lists, etc. — learned on the job with another employer or using them to start their own business.

In addition, they can guard against an employee taking customers or clients with them to a new employer or starting their own business and stealing employees from the previous employer.

Most employers that use such agreements require employees to sign them when they are hired. Signing the agreement is required to get the job. Sometimes, an employer will try to get an employee to sign a non-compete agreement after they have already started working. To get them to agree, most employers are forced to offer a raise or promotion.

Non-compete agreements aren't only used by employers and employees. The agreements are also drafted when businesses are sold. When a business is sold, the buyer often requires the seller sign a non-compete clause as to not just walk away and establish a competing operation.

Parts of a non-compete agreement

Even though each non-compete agreement is written specifically for each employer, there are several key components each should include:

Parties involved: First and foremost, the document needs to spell out who the agreement is between. It should include the name and address of both the employer and employee. 

Time period: There must be specific detail as to exactly how long the terms of the agreement will last. 

Non-competition: This clause spells out exactly where an employee is restricted from working after leaving the employer. This clause can also include details on which privileged information must remain confidential.

Competition: The employer must define who their competitors are. It's not necessary to name them all individually, but it must define the types of businesses and industries employees are prevented from working in.

Damages: This clause details what damages the employer is entitled to should an employee violate the agreement.

Non-compete agreement templates

While every business would be best served by hiring a layer to draft a non-compete agreement specific to their needs, there are a number of sample templates available online for the purpose of review. Non-compete agreement templates can be found online at:

Challenges of a non-compete agreement 

Despite being widely used by employers, there aren't a lot of guarantees that non-compete agreements would hold up in a court of law. In the past, many courts have been hesitant to enforce such agreements because they are often deemed unfair. In order for a court to enforce a non-compete, the agreement can't last too long or cover too large of a geographical area.

Follow Chad Brooks on Twitter @cbrooks76 or BusinessNewsDaily @BNDarticles. We're also on Facebook & Google+.

Chad Brooks

Chad Brooks is a Chicago-based freelance writer who has nearly 15 years experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.