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A non-compete agreement is a legal contract that prevents former employees from working in a similar field within a designated area for a specific period of time. It aims to protect a company’s trade secrets, customer base, and talent retention. However, its enforcement varies by state and must be reasonable and specific to be enforceable. Some jurisdictions have banned this type of contract.
A non-compete agreement, also called a non-compete clause, is a formal agreement asking former employees not to perform similar work within a designated area for a specified period of time after leaving their employer native to. Many workers sign one as part of the paperwork required for employment. It can be a separate document similar to an NDA, or buried within a number of other clauses in a contract. This agreement is generally legal and enforceable, although there are some exceptions.
Every time a business hires skilled employees, it invests a significant amount of time and training. It often takes years for a research chemist or design engineer to develop a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, anything can happen. The employee could work for the company until he retires, accept a better offer from a competitor, or start his own business. That’s why companies encourage signing a non-compete agreement. Without something in writing, there would be few legal ways to stop an employee from starting a new company across town.
A non-compete agreement can cover a number of potential problems between employers and former employees. Many companies spend years developing a local client or customer base. It is important that this customer base does not fall into the hands of local competitors. When an employee signs a non-compete agreement, you usually agree not to use inside knowledge of the company’s customer base for unfair advantage. The pact often defines a large geographic area considered off-limits to former employees, perhaps hundreds or even thousands of miles.
Another area of concern covered by the agreement is a potential “brain drain”. Some former high-level employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital to most companies, so a non-compete agreement can set definite limits on hiring or recruiting employees. This type of agreement is difficult to enforce in real life, since many employees don’t feel legally obligated to stay with any company without a hard-and-fast contract.
It can also define a specific period of time before a former employee can seek employment in a similar field. This may seem particularly harsh to outsiders, as the freedom to seek gainful employment appears to be a natural right for any worker. In reality, the potential damage from a disgruntled former employee, especially one with intimate knowledge of the inner workings of a company, can be tremendous. Many companies offer a substantial severance package to ensure former employees are financially solvent until the terms of the agreement have been met.
Because the use of a noncompete agreement can be controversial, a handful of jurisdictions have already banned this type of employment contract. In the United States, legal enforcement of these agreements falls to individual states, and many have sided with the employee during the arbitration. An agreement must be reasonable and specific, with defined time periods and areas of coverage. If it gives the company too much power over former employees or is ambiguous, state courts can rule it too broad and therefore unenforceable. In that case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting a new company of their own.
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