Non-Compete Agreement: Overview & Clauses (Free Templates)

A Non-Compete Agreement is a legally binding agreement or clause in a contract between an employer and employee that states that an employee is unable to enter into direct or indirect competition in the same industry, city, or state as their employer after their employment has been terminated for an agreed period.

As an employer, you have probably heard your lawyer talking about having your employees sign a non-compete agreement before joining your company. Many employers demand their employees sign this contract as a form of protection from more competition that might arise from former employees (who have an in-depth knowledge of their business models and trade secret information) either starting a similar business or joining a directly competing company over an agreed period.

Thus, it has become a ubiquitous business practice for employers to add a non-compete agreement to their employees’ terms of employment, especially when the employees’ roles grant them access to sensitive business information.

This article will give you an insight into the importance of a non-compete agreement to businesses and why employers should have it as part of their internal business structures.

What is Non-Compete Agreement?

A non-compete is usually signed before the employee joins the employer’s company, and it is binding upon the employment termination from the current employer. From an employer’s perspective, the essence of this agreement is to prohibit or discourage your talent from leaving for another competing company or revealing your sensitive information to another party during or after their employment with you.

For a level of fairness to be attained between employers and employees, there is usually a timeframe for the validity and enforcement of non-compete agreements. These timelines vary from state to state and case to case. For example, some states in the United States, including California, Oklahoma, and North Carolina, do not support such an agreement. In contrast, others have a list of companies and careers that are suitable for a non-compete.

However, the common duration for a non-compete agreement is usually between six months to two years after an employee’s contract with the employer has been terminated. The validity period must have been clearly stated in the contract, and in some cases, a clause in the agreement states that a former employee may earn a base pay while the agreed period is yet to be completed.

While the most commonly used phrase is a non-compete agreement, you can find other names by which this agreement may be known. These alternate names include non-compete, non-compete covenant, non-compete clause, restrictive covenant, and covenant not to compete.

Significance of Non-Compete Agreement

A non-compete agreement is usually signed by an employee to provide the employer with security. As an employer, you are at the risk of making your confidential information unsafe once it is accessible to your employees. So a non-compete agreement will help you ensure that existing competitors do not have access to your company’s information, especially through an ex-employee. The agreement also prevents employees from remodeling your business style or using your business secrets for their personal businesses.

Apart from securing an employer’s information from existing and potential competing companies, a non-compete agreement also helps keep its best talents. For example, having signed a non-compete, your employees may be unable to jump ship and take up a new job with your direct competitors in the same geographical location or industry over an agreed period. Similarly, a worker can be prevented from getting a job in their field if they leave the position they have signed a non-compete with you.

Types of Non-Compete Agreements

Following are the types of non-complete agreements:

Independent contractor non-compete agreement

An independent contractor non-compete agreement is a kind of agreement between a contractor and a company that prevents the contractor from working for the client’s competitor or companies in the same industry. This is usually in companies where a contractor has access to its clients’ trade secrets needed to get the project done.

Employee non-compete agreement

An employee non-compete agreement is the standard legal agreement between an employer and employee when the latter is set to learn the former’s trade secrets that a competitor might find valuable during or after their employment tenure. Similarly, this agreement prohibits an employee from starting a company that competes with the employer, even after the termination of a contract.

Release of a non-compete agreement

A release of a non-compete agreement is a legally binding agreement that permits an employee to do without the responsibilities highlighted in the compete clause included in the contract agreement between employer and employee. These responsibilities include trade secrets, business confidentiality in line with operations, business strategies, clients, and others.

Sales non-compete agreement

A sales non-compete agreement is a legal agreement between a company and its sales professionals who have access to its information, such as technical data, customer data, sales methods, etc. You may request your sales officers to sign a sales non-compete agreement in order to protect your company from any data breach or competition that might arise if a salesperson decides to sell such data to a competitor or use it for their personal goals individually or on a new job.

Non-disclosure agreement

A non-disclosure agreement is a confidentiality agreement between a business and its employees or independent contractors. In a non-disclosure agreement, such employees and contractors are restricted from sharing any sensitive business information they are exposed to during the course of their contracts with competitors and the world at large. For example, in the high tech, pharmaceutical, and other manufacturing companies where proprietary products are manufactured using formulas, innovations, patents, among others, a non-disclosure agreement prevents every stakeholder from stealing or transferring the confidential information they have access to.

Industries Where a Non-Compete Agreement is Applicable

Non-compete agreements are slowly becoming the order of the day in virtually every segment of the business world today. Any company can make a non-compete agreement a part of its internal processes.

Major industries where non-competes are used include:

Media industry

In the media industry, radio, television, and online media channels have their unique shows and programs that set them apart from other companies in the same industry. As an employer in the media world, you want to prevent your journalists, reporters, anchors, producers, and other staff at the forefront of information from being poached by competitors. You also want to ensure your company information is safe from your competitors, and your employees are unable to leave with your clients. A non-compete agreement can be used to achieve these goals.

IT industry

Suppose you are an employer in the Information Technology (IT) industry. In that case, you have no choice but to divulge proprietary information to some of your employees, and you need the utmost level of confidentiality. A non-compete agreement will come in handy in protecting such valuable company information, especially after the employee(s) involved have their contract terminated by the company or themselves.

Monopolistic industry

Monopolistic companies like restaurants, clothing lines, service industries, etc., have unique recipes and trade secrets that differentiate their products and services. Employers use a non-compete agreement in such an industry to reduce the possibility of losing their sensitive information to competitors and their competitive advantage. It also helps them reduce the number of employee exits, especially for their trained employees, who have invested a lot of resources.   

Manufacturing industry

In the manufacturing industry, employers also deploy non-competes to protect their intellectual property, trade secrets, information about their clients, their business models, and others. For example, after you have invested in training an employee on how to use certain production devices and exposed them to your product secrets, you would not want them to leave with the skills, knowledge, and information at their disposal. More importantly, you cannot guarantee that they will not share your trade secrets with your competitors or use such information to start their own business. Therefore, you can use a non-compete to put them in check and ensure maximum compliance with your policies.  

Legalities Concerning Non-Compete Agreements

As an entrepreneur in the United States, you must have a good understanding of your state’s labor laws and business legalities. Different states in the country have diverging positions on the legal status and application of non-compete agreements. At the same time, you should stay up to date with the unending debates and updates in line with the legalities of non-compete agreements in your geographical location.

Applicable laws

In some states like Oklahoma and North Dakota, having a non-compete clause as part of employment contracts is considered illegal. In a state like California, non-competes are not recognized or enforceable, and an employee has the right to sue an employer requesting for one to be signed. Similarly, in 2015, the government of Hawaii banned the use of non-competes in companies in the high-tech category. In 2016, Utah also put out the law that a non-compete agreement temporal restriction should be limited to only one year.

Note

In the state of New York, there has even been a case where the Attorney General’s office went after media companies for including non-compete clauses in their contracts.

Ultimately, in most states where non-competes are permitted, the agreement should be reasonable. This means that the duration and geographical area referenced in a non-compete agreement should be fair and not obstruct an employee’s ability to find another job. But these positions vary per state, so you might want to talk to your lawyer to find out the laws applicable to your locale.

Non-solicitation of the employees

An employee non-solicitation contract is an agreement between an employer and employee that prevents them from soliciting or hiring other employees of a company they have worked for. In other words, this agreement prohibits an employee from hiring their previous co-workers for their new company or business.

Non-solicitation of the customers

This non-solicitation contract is signed by an employee who agrees not to attempt to solicit their employer’s clients or customers. This is commonly used in roles that grant an employee access to an employer’s customers’ data and other clients’ information. 

Validity in court

For a non-compete to be admissible, a court will consider a couple of factors, such as whether it is reasonable, its application in the geographic area, the period provided by the contract, and the activities the clause restrains. A non-compete is also valid in court if the employer’s interests are genuine and can be valued.

Notarization requirement

A non-compete agreement can be enforced without notarization once it is signed by both parties involved. However, if a party can prove that they never signed the agreement or prove that the contract is against the public interest, a non-compete can be rendered void.

Particulars of a Non-Compete Agreement

Generally, a non-compete agreement is expected to be fair for both the employer and employee before the contract can be enforced.

The major elements that must be part of your non-compete agreement include:

  • The effective date of the agreement: which is the day both parties agree to the non-compete contract.
  • Names of employer and employee: which must be clearly stated at the beginning and can be referenced in the agreement subsequently as “employer” and “employee”.
  • The type of work that is restricted: should also be clearly highlighted, and if more details are needed, they should be clearly included in the scope of the agreement to ensure both parties are on the same page.
  • Terms of restriction: including the reason(s) for enacting the agreement, the date the employee will be requested to stop working, the geographic area in which the agreement would be valid, and clear terms regarding the type of compensation that the employee will receive if he/she complies, and what the employer gets if the employee breaches the contract.
  • The duration of the agreement: usually ranges between six and two years, but it can be more or less in some cases. Hence, you must clearly state the timeframe for which a non-compete agreement is binding.
  • Signatures of involved parties: which is the final action that seals the agreement and makes it effective.

What is Non-Compete Agreement Template?

When creating a non-compete agreement, you will need a template that your agreement will follow. A non-compete agreement template is a guide that you can follow to draft your non-compete agreement. It relieves you the stress of having to draft a template from scratch, as you only need to input the necessary information in the places provided. So, get started with any of the available tested and trusted non-compete agreement templates and have your agreement drafted instantly.

Following are some free downloadable templates for you:

Non-Compete Agreements

    Forms by State

    How Non-Compete Agreement Works

    Below is explained how a non-compete agreement works:

    Competitor research is done

    Before highlighting your direct competitors in the same industry, you must do your homework by finding similar companies with the same products and services like yours, especially in your immediate location.

    The agreement is created

    After doing your research, get the agreement created. You may follow the guide provided earlier under the “particulars of a non-compete agreement” or create an agreement online.

    Help is sought from a legal professional

    Since this is a legal and critical aspect of your business, we recommend that you talk to a legal professional after a non-compete agreement is created. A lawyer can find out loopholes or errors in your contract, especially in relation to your industry.

    The contract is read to the employee

    To be on the safer side, read the non-compete contract terms alongside the employee entering into the agreement. You should check for understanding and give room for questions and clarity.

    The contract is endorsed

    Upon clarity and satisfaction on your end and that of the employee, both parties can sign the agreement and have a copy of each for record purposes.

    Related: Sample Independent Contractor Non-Compete Agreement

    Pros and Cons of Non-Compete Agreement

    As an employer, having a non-compete agreement included in your company’s policy will be of immense benefit to you. You do not want to leave your trade secrets and confidential information to chance. So, protect them with a non-compete agreement and have a legal adviser by your side every step of the way.

    A non-complete has its pros and cons which will be discussed below.

    Pros

    Pros of a non-complete agreement include:

    • Protects a company’s trade secrets and sensitive information: Signing a non-compete agreement will help protect a company’s business secrets and information since employees cannot share such information with a competitor – even after their exit from the company. 
    • Reduces labor turnover rate: A non-compete agreement reduces the possibility of an employee looking for a similar job with a competitor. Thereby reducing the number of employees exiting from the company.
    • Encourages long-term commitment and investment: An employee who signs a non-compete will most likely remain committed to their employer and keep growing with the company, especially when the company also invests in such a worker.

    Cons

    Cons of a non-complete agreement include:

    • Limits employee’s bargaining power: Usually, an employee is asked to sign a non-compete contract upon resumption of the job. Many of them have already left other opportunities and opted for their current job, leaving them with little to no choice.
    • Reduces employee’s chance at getting another job in the same field: When an employee signs a non-compete agreement, they are required not to join a competitor or start a competing company with their employer. This limits their chance of switching jobs in the same industry.
    • Possibility of losing top industry talents: Since a non-compete agreement prohibits an employee from joining another competing company or starting their own, they may be forced to leave the industry in which the contract is valid, taking their talents with them.

    Frequently Asked Questions

    How is a non-compete agreement negotiated?

    As a new employee in a company requesting for a non-compete to be signed as part of your employment conditions, you may consult an employment attorney for help negotiating the agreement. Similarly, do not hesitate to reach out to the company’s human resources department for questions related to negotiations.

    How enforceable is a non-compete agreement?

    The conditions for which a non-compete agreement is enforceable differ from one state to another. You should also know that some states do not recognize or enforce non-compete agreements at all.

    Do both parties have to sign a non-compete agreement?

    To make a non-compete agreement legally binding, both the employer and employee are expected to approve it with their signatures. Otherwise, it is invalid and not legally binding.

    In what states are non-compete agreements legal?

    In the United States, non-compete agreements are legal and enforced in virtually all the states except for a few states like North Dakota, Oklahoma, and California. Therefore, you should research the legality of such an agreement in your state or talk to an attorney if your employer requests a non-compete.

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