What Is a Noncompete Agreement?
A noncompete agreement is a contract between an employee and an employer, where the employee agrees not to enter into competition with the employer after the employee terminates or is terminated. Noncompete clauses (NCCs) are legal contracts in which an employee agrees to avoid or not enter into markets or professions considered competitive with the employer.
Why Employers Use Them
Noncompete agreements are enforced when a relationship between an employer and employee ends and the employer wishes to prevent the employee from competing against them in their next position, whether working for a competitor in the same market or starting up another business in the same field.
Consultants and independent contractors who terminate their relationship with a company are often subject to noncompete clauses to avoid competition after the separation.
Employers may also seek noncompete agreements to protect themselves against former employees revealing secrets or sensitive information about the employer's trade, operations, clients, customers, formulas, pricing, strategy, salary, methods and practices, ideas, future products, or public relations and marketing plans.
A noncompete agreement is typically in effect for a certain period of time after employment ends. It is important to determine these dates well in advance and to seek legal counsel, as employers can only set NCCs within a realistic timeline and cannot permanently prevent someone from furthering their careers in that field.
There are issues regarding whether noncompete agreements are legally binding.
There isn't a simple answer. It varies from case to case and can depend on state law, on how restrictive the agreement is (how much it limits someone from working in their field or location), and on what the employer construes as competition.
NCCs are usually considered legally binding as long as the agreement has reasonable limitations, such as a clear, realistic region where the employee may and may not work or an exact amount of time that must pass before an employee may commence work in the field again.
However, the validity of noncompete agreements varies by state. Some states disregard these agreements altogether, while others pick and choose which careers prove more risk for a company and, therefore, can be subject to such an agreement.
What Is Typically Included in a Noncompete Agreement?
Noncompete agreements overall must be both fair and equitable for all parties. NCCs require certain information in order to be considered legally binding:
- An effective date on which the agreement will begin
- A reason for enacting the agreement
- Specific dates during which the employee will be barred from working in a competitive sense and the location covered by the agreement.
- Details as to how to the noncompeting party will be compensated for agreeing to the terms
Also Known As: Noncompete, noncompete clause, noncompete covenant, covenant not to compete
Examples of Noncompete Contracts and Clauses:
- Amarella signed a noncompete agreement when she started her software development position at XYZ Company.
- The noncompete agreement that Robert signed was deemed invalid by a California judge.
- Jasmine asked to speak to her attorney before signing a noncompete clause that bound her to never work for another company in the field.
Suggested Reading: What to Look for in an Employee Confidentiality Agreement