A non-compete agreement is embedded in a contract prohibiting an employee from entering into competition with an employer after the employment period ends. It is a legal document that further restricts the employee from revealing proprietary information or secrets to other parties during or after employment.
Usually, there is a time frame for when the employee is barred from working for a competitor after they leave the employment. Employers mandate that the employees sign non-compete agreements to keep their place in the market. The validity and enforcement of a non-compete will vary depending on which state you reside in.
Non-compete agreements are set in place to protect the company’s interests. As stated above, an employee signs this agreement for some time to ensure that the company’s business interests are met. This contract provides that the employee cannot indirectly or directly compete with the company.
These agreements are meant to create safety for the company and ensure that their business is not impacted due to their employees leaving. It allows them to control their employees even after they leave the company. If your employer asks you to sign a non-compete agreement, consult a legal professional. You can find more resources on the LegalMatch.com website on this topic.
There are certain elements to look for in these contracts and understand how they impact your employment rights. A basic non-compete agreement can include the length of time for the agreement, the geographic location the employee may work in, and the market they are permitted to work in.
Although these non-compete agreements are considered restrictive, they are only meant to be used in certain situations. If you believe you are being wronged in your company regarding the non-compete agreements, contact a lawyer to assist you further.
What Are the Components of a Non-Compete Agreement?
Several aspects of a non-compete agreement are included in most of these contracts. The basic non-compete agreement consists of the following elements:
- Duration: There is a specific time frame for when the non-compete agreements become effective. For instance, the agreement can have a time frame of six months and up to one year. However, long-term agreements are prohibitively restrictive for employees because they can prevent them from finding work after leaving an employer;
- Geography: Some agreements evaluate the geographical location and prohibit a former employee from working in particular areas for a set time;
- Scope: Creating a scope for the type of work that cannot be provided is necessary because it allows the former employee to understand their duties. For instance, the agreement can restrict certain information, techniques, procedures, and practices that are unique to the business or otherwise proprietary;
- Competitors: Formulating a list of industries or types of businesses that the ex-employee should not be working with can prevent future conflicts. Clearly defining the competition will help the former employees understand what their boundaries are when it comes to these agreements; and
- Damages: Employers can determine the damages they are entitled to if an employee breaches the agreement.
When Are Non-Compete Agreements Utilized?
There are primary reasons why non-compete agreements should be utilized. Businesses use them to safeguard their intellectual property, trade secrets, proprietary information, and procedures to produce their goods and services or maintain their competitive advantage.
The main purpose of these agreements is not to put one company at a disadvantage due to their former employer. Without the contract in place, the employer could now legally share the information with the competitor company there would be nothing stopping them from advancing more. Furthermore, former employees can initiate their own businesses based on the trade secrets they had access to in their previous employment.
Non-compete agreements are utilized because if the ex-employee decides to use that information, they could be forced out of the market or the industry. Therefore, the hiring department pays special attention to this matter and attaches this contract as part of the employee agreement.
Although your company can legally have you sign a non-compete agreement, it does necessarily mean that it will meet the requirements to be enforceable. Therefore, before signing one of these agreements, it is important to know your rights. Each jurisdiction has regulations regarding how to carry out a non-compete agreement legally. The contract must be fair regarding its provisions and not overly restrict the employer regarding their career outlook. Depending on your state, you can research the local laws through the LegalMatch.com website.
What Types of Business Interests Can a Non-Compete Protect?
As stated earlier, the court examines certain key elements before enforcing a non-compete agreement. One of the most significant aspects of determining the validity of a non-compete agreement is whether it protects the employer’s legitimate business interest. The following are known as some common legitimate business interests:
- Specialized technical training;
- Any trade secrets;
- The business relationships with particular customers and clients and;
- Confidential business or professional information.
As mentioned above, a valid non-compete agreement must include a geographical area limitation. For instance, some non-compete agreements define geographic restriction by a radius around the company’s headquarters. However, others may limit the non-compete agreement to specific cities where the employer does business.
The geographic area must be reasonable and not expand beyond the necessary areas. If the court determines it is not within reasonable limits and spreads beyond, they can deem the non-compete invalid. For example, restricting a single city versus an entire state would be more reasonable and consistent with the standards of the non-compete agreement. Defining and justifying a larger range for the restriction will be an uphill battle.
Regarding the time limitation, most employers view between six months and two years as a reasonable non-compete time frame, with one year being quite common. But, depending on the industry and type of career, this could vary. The longer the time frame, the more likely the court will challenge it.
When Are Non-Compete Agreements Enforceable?
Each state has its distinctive approach to handling the enforceability of non-compete agreements. Some states consider non-competes overly restrictive on competition, meaning they are only enforceable in certain situations.
In the states where non-competes are permitted, there are certain factors the courts examine to determine their applicability and enforcement. Below are some of these factors that come into evaluation:
- Whether the non-compete agreement protects a valid and legitimate business interest;
- Whether or not there is a reasonable time frame for the restriction;
- Whether or not the non-compete is limited to a particular geographical location;
- Whether or not the local state jurisdiction permits the use of non-compete agreements and;
- Whether or not there is some sort of benefit for the employer for agreeing not to work with the competitor (stock options, bonuses, or more compensation).
What Is the Newest Law Governing Non-Compete Agreements?
The Federal Trade Commission (FTC) voted to impose a new law, referred to as the Final Rule or Non-Compete Clause Rule, that will place a ban on nearly every type of non-compete agreement. This law was voted on in April of 2024 but will not fully take effect until 120 days following the publication in the Federal Register.
This means that the law may take effect, and employers may be required to comply with it, as early as August 2024. Because of this, it is important for employers to begin making preparations now as well as meeting with their attorneys to ensure they are in compliance with the new rule when it applies.
Are There Any Exceptions to the Final Rule?
The Final Rule does have one exception to the blanket ban on non-compete agreements, which is non-compete agreements given by companies to senior executives. This exception is in place because these agreements are more likely to have been negotiated between the parties involved.
As for workers who are not classified as senior executives, any existing non-compete agreements will no longer be enforceable after the effective date of the Final Rule. All employers will be required to provide workers who have non-compete agreements in place with notice that those agreements are no longer enforceable.
What Else Should I Know about the Final Rule?
It is important to be aware that the Final Rule does not affect or limit the enforcement of any state laws restricting non-compete agreements, so long as the state laws do note conflict with the Final Rule. As a federal law, the Final Rule preempts any state laws that conflict with it.
It is also important to note that the Final Rule contains a severability clause. This means that, if any part, provision, or application of the Final Rule is found invalid or unenforceable by a court, the remainder of the Final Rule will still apply and will not be affected.
It is likely that this rule will be challenged in court once it is in force. There is also the possibility that it may be completely struck down, or eliminated, at a future date.
Because of these issues, it is essential for all employers who have non-compete agreements with their workers to consult with a lawyer to ensure that they are in compliance with the laws, no matter what state of change they may be in.
If an employer or employee is currently involved in litigation, it is important to be aware of this upcoming change and the possible consequences it may have on the case. Although the rules that were in place at the time the litigation began will likely be the one used to decide the case, it is still important for clients to consult with their attorneys about these upcoming changes so they can make the proper arguments in court.
It may be possible to present their claim in such a way that they will have a favorable outcome whether the Final Rule is implemented, is banned, or is changed in some way. It is essential for current clients to request that their attorneys keep them updated of the current status of the Final Rule throughout this year and as courts make rulings in the future.
When Do I Need to Contact a Lawyer?
Although non-competes are legally valid, they can be restrictive regarding your career prospects. Therefore, before signing this contract, you must understand its legal implications.
If you believe that your former employer is being unfair or too restrictive, you can contact a local employment contract lawyer to help you in your case. The lawyer can guide you through this process and explain to you what your legal options may be.
