A noncompete agreement is a contract that is signed at the beginning of a business relationship between an employer and an employee in anticipation of a time at which the employee leaves the company. A noncompete agreement must be comprehensive and easy to understand, so it is important that the contract explicitly and unambiguously includes the components discussed below.
Purpose of a noncompete agreement
Noncompete agreements prohibit an employee from actions that compete with the business’ interests for a specific duration of time after their employment has ended. They are not meant to stifle the employee’s ability to earn a living at another company, but rather to protect trade secrets from competing companies. Although the needs for each business’ noncompete contract may vary, it is common to prohibit the employee from working for a competitor company or individual, starting a new company offering the same products or services, developing and offering competing products or services and/or recruiting former colleagues to join their new business.
Business interests to protect
Noncompete agreements are only considered valid in court if they actually protect legitimate business interests of the employer. Otherwise, there is no reason to stop the employee from competing against a former employer. There are many legitimate business interests that can be included in a noncompete agreement, but some common ones that are protected include trade secrets, confidential business information, relationships with specific clients and/or specialized training. Noncompete agreements must be written carefully and with relevant terms so that they are upheld in a court of law.
Terms and agreements to include
- Non-solicitation terms: It can be important to prevent employees from soliciting clients for a competitor. This will also prevent departing employees from trying to poach staff for another employer.
- Confidentiality and non-disclosure terms: Employees learn trade secrets while employed that are often in the business’ interest to protect. It is necessary to specify what type of information is confidential and prohibited from disclosure to a competitor since the information that is protected by noncompete agreements must be proprietary.
- Work-for-hire terms: An employee may generate many tools and resources while employed, so a noncompete contract might specify that the company owns all products from the employee created while employed. This ensures that the property of the work that the employee does belongs to the company and not the individual.
- Incentive compensation: This type of agreement provides specified compensation in return for remaining at the company for a designated period of time.