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Start Your Business Startup Basics

What is a Non-Compete Agreement?

What is a Non-Compete Agreement?
Credit: Uber Images/Shutterstock

For a business to grow and prosper, it must invest in the proper resources. The most important of those are employees: individuals who bring or can learn the skill sets that make your company bigger and better. It is a significant investment on the part of the company. To help protect that investment and their businesses, many companies turn to non-compete agreements or clauses during their hiring processes.

In its simplest terms, a non-compete agreement or clause 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 time frame 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, processes, 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. These agreements are also often drafted when businesses are sold. The buyer may require the seller to sign a non-compete agreement to not just walk away and establish a competing operation.

Tricia Meyer, founder and managing attorney of Meyer Law, said that the overall purpose of a non-compete agreement is to act as a limiting measure: "It acts as some kind of deterrent to keep employees from going out and start doing their own version of the business in direct competition."

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

  1. Duration: Long-term non-compete agreements rarely hold up in court. Typical agreements are two years or less, with the most common being six months to a year. They can also include a severance option if the employee is terminated. 
  2. Scope: This clause must be specific as to the restricted work and particular services.
  3. Geography: The local area where the company does business is a reasonable determination. Sometimes they include a mile radius around the office address.

Non-competition agreements can also include these details:

Competition: The employer must define who its 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.

The keys to enforceable non-compete agreements are to follow state laws regarding non-competes (each state is different), make it reasonable for the employed individual to still find employment or establish a business, and to make sure it is proportionate to what is being protected and what the employee is giving up.

Despite them 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. For a court to enforce a non-compete, the agreement can't last too long or cover too large of a geographical area. 

"There are states, such as California, where they are hardly enforceable at all, and other states, like Illinois, where low-wage employees cannot be held to them," said Meyer.

One alternative measure would be a non-solicit agreement.

"In a non-solicit, the employee agrees to not leave and take customers or other employees with them," Meyer said. "This is much more enforceable, and offers protection as well."

Another option is a confidentiality agreement, also more enforceable than a non-compete clause. Non-solicit and confidentiality agreements can be used in conjunction with one another, depending on the industry and information or products being protected, and still be the deterrent that makes an employee think twice.

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

Additional reporting by Chad Brooks. Some source interviews were conducted for a previous version of this article.

Marci Martin

With an Associate's Degree in Business Management and nearly twenty years in senior management positions, Marci brings a real life perspective to her articles about business and leadership. She began freelancing in 2012 and became a contributing writer for Business News Daily in 2015.