To successfully grow your business, you need a good team. Training and nurturing employees to expand their skill sets will make your company bigger and better. However, employee training and development can be a significant investment.
It would be unfortunate to see all of the knowledge and resources you put into your employee training efforts leveraged against your business by team members who leave to work for a direct competitor or start their own business in the same region and field. Noncompete agreements are an excellent tool to help protect your business and secure confidential information shared with employees.
A noncompete agreement or clause is a legal document that prohibits employees from competing with your business after their employment is severed. A noncompete agreement can provide several types of protection.
The time frame for a noncompete clause can vary greatly, usually ranging from six months to five years but sometimes lasting even 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.
Tricia Meyer, founder and managing attorney of Meyer Law, said that the overall purpose of a noncompete agreement is 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.”
When is a noncompete agreement required?
Noncompete agreements are commonly used in several situations.
Noncompete agreements are well suited for situations where employees could use the knowledge gained or client relations built to compete with your business directly and negatively impact it.
Even though each noncompete agreement is written specifically for each employer, Meyer noted that each should address three key components.
Noncompetition agreements can also include details on direct competition and damages.
These are the keys to enforceable noncompete agreements:
Despite them being widely used by employers, there aren’t any guarantees that noncompete agreements will hold up in a court of law. Many courts have been hesitant to enforce such agreements because they are often deemed unfair. For a court to enforce a noncompete, the agreement can’t last too long or cover too large of a geographical area.
Before creating and implementing a noncompete agreement, verify that your state recognizes them. California does not recognize noncompete agreements. Other states, such as North Dakota and Delaware, won’t enforce them.
One alternative to a noncompete agreement is a nonsolicitation agreement.
“In a nonsolicit, 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 nondisclosure (or confidentiality) agreement, which is also more enforceable than a noncompete agreement. You can use nonsolicitation and nondisclosure agreements in conjunction with each other, depending on the industry and information or products being protected, and still create a deterrent that makes an employee think twice.
|Restricted or prohibited action||Noncompete||Nonsolicitation||Nondisclosure|
|Working for a competitor||Yes||No||No|
|Sharing trade secrets||Yes||No||Yes|
While businesses would be best served by hiring a lawyer to draft a noncompete agreement specific to their organization’s needs, several sample templates are available online to review. You can find noncompete agreement templates online at these sites:
Several online legal services can help employers create basic documentation and employment paperwork. If you’re on a budget, this may be a good compromise between hiring an attorney and using a template. Just be aware of the limitations of these services.
Marci Martin and Chad Brooks contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.