When your company has confidential information and trade secrets, you might be considering methods for protecting them. You may even want to ensure the retention of your top-performing employees. Enter: non-compete agreements.
Chances are you’ve heard of the elusive non-compete agreement but may not be very familiar with its intricacies. What exactly should be covered? How can you ensure it’s enforceable? These are valid questions, as the answers vary by state and case.
In our latest guide, we share everything you need to know to start determining if this type of contract is the right choice for your business and certain employees. We’ll answer critical questions, including:
- Exactly what is a non-compete agreement?
- What must be defined in the contract?
- Where are non-competes legal?
- When are they allowed?
- Does your business need them?
Read on to ensure you have a clear understanding of how non-compete agreements work.
What is a non-compete agreement?
A non-compete agreement is a contract between an employee and an employer in which the employee agrees not to work for a competitor or start a competing business during or after employment for a specified period of time.
You may have also heard this referred to as a non-compete, noncompete clause, non-compete covenant, or covenant not to compete.
What must be defined in a non-compete agreement?
First of all, this should be a fair and reasonable contract for both parties. The standard elements required for a legal non-compete agreement include:
- The date on which the agreement begins
- A reason for enacting the agreement
- Specified period of time during which the employee will be prohibited from working in a competitive sense
- Location covered by the agreement
- Details as to how the employer will compensate the employee for agreeing to the terms
Generally, courts have ruled that a job is sufficient compensation for signing a non-compete agreement. This means that you can make a job offer contingent upon signing the contract. However, it’s essential (and often a statutory requirement) to give the new hire ample time to consider this. Some employers may still want to offer an additional form of compensation to new employees for signing the agreement.
When requiring an existing employee to sign a non-compete, you should be prepared to offer them an additional benefit like a promotion or raise in exchange for agreeing to the terms.
Where are non-compete agreements legal?
Certain states do not enforce non-competes, such as North Carolina and Oklahoma. California does not recognize the covenants at all—in fact, requiring employees to sign them can open your organization up to a lawsuit! The state notes that workers may not be aware that these contracts cannot be enforced. If you require them to sign anyway, the state essentially sees it as you scaring and bullying the employee into believing that they could be sued for competing.
Other states allow and enforce non-compete agreements based on job type, role, and industry. For example, Massachusetts has banned the contracts for the following professions:
- Social workers
- Broadcasting industry
Always consult with your legal counsel and human resources team to determine if non-competes are enforceable in your state and if there are stipulations it must meet.
When are non-competes allowed?
Even in states where they are allowed, non-competes must be reasonable (i.e., limited) in scope. An enforceable non-compete features:
- Short Time: Opt for two years or less post-employment. Like Massachusetts, some states will only enforce the agreement if the time restriction is under one year. The shorter the agreement, the more likely a court is to find it reasonable.
- Limited Area: Focus on a geographical region that would negatively impact your business if your employee were to start competing there. This will depend on your industry and location, but a court is more likely to find it reasonable if the area is limited.
- Specific Competition: Include a shortlist of direct competitors or prohibit the employee from starting a new business in the same field. A brief, defined list is also more likely to hold up in court.
Non-competes limit workers’ rights to earn a living, so you should only ask that employees sign if it’s necessary to protect your business. This could mean high-performing executives with access to trade secrets or salespeople who could poach your client list.
It is also important to note that an increasing number of states prohibit non-competes on low-wage earners. For example, New Hampshire enacted a new law in 2019, stating that the contracts are unenforceable for low-wage workers. The Granite State defines “low-wage” as earning an hourly rate less than or equal to 200% of the federal minimum wage (i.e., employees currently earning $14.50 or less per hour).
Additionally, there are often requirements regarding the timing and form of the covenant not to compete. Again, using the Bay State as an example:
- Massachusetts employers who require new hires to sign a non-compete must provide a copy of the agreement to the employee either before making a formal offer or 10 days before the employee starts, whichever comes first.
- Those who require current staff members to sign a non-compete must provide the agreement no less than 10 business days before the contract becomes effective.
As an employer, you must know exactly what can and cannot be enforced through a non-compete and what a legitimate contract includes.
Does your business need non-compete agreements?
Assess this on a case-by-case basis, and only if they are enforceable in your state. Requiring low-wage employees like customer service representatives or office administrators to sign a non-compete agreement is banned in most states because even if they go to work for a competitor, it likely won’t hurt your company.
On the other hand, an engineer with knowledge of your technology and systems’ intricate workings should sign a non-compete, if possible, to protect your business.
The benefits of non-compete agreements for your company include:
- Protecting your company’s confidential and sensitive information from being shared with competitors
- Increasing employee retention by hiring employees who want to stay long-term. Plus, workers who do leave won’t be able to poach other employees later.
- Allowing you to develop employees, so they grow with your company and are less likely to leave. Consider investing in advanced training to help them build their skills and encourage them to stay.
The key is to be strategic, specific, and fair if you decide to use non-compete agreements. In a 2016 report, the Office of Economic Policy estimated that 37% of workers are asked to sign a non-compete only after accepting a job offer. At that point, they have little bargaining power and have probably declined other opportunities.
The report also found that non-competes can be detrimental to the workforce by driving highly-skilled workers to exit their fields, leaving their valuable training and experience on the table.
Non-compete Agreements Done Right
Again, always discuss with your lawyer and HR team before requiring employees to sign a non-compete covenant. They will guide you on the legalities and requirements of these contracts in your state.
Remember that generally, a substantial non-compete agreement is:
- A contract that legally prevents an employee from working for or becoming a competitor to you, their employer, for a set period after the working relationship ends.
- Specific and limited regarding the reason, time, location, and competition.
- Presented to the employee with ample time to review and consider their own legal counsel if necessary.
- Accompanied by an offer of compensation, especially if the individual in question is an existing employee.
- Required of high-level employees or those with confidential information that could harm your company if shared with competitors.
BlueLion’s HR experts will be happy to provide you with guidance on developing compliant non-competes for your business and employees. Contact us at firstname.lastname@example.org or 603-818-4131 to get started in the right direction today!
The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.