Remember when your parents used to tell you that you’re not old enough to do something or say you’re only allowed to do it when you move out of the house? Non-compete agreements are very much like that. They act like a parent that says there’s a time restriction on something you can’t do and/or place a restriction on something you can do based on the field of work you’re in or the area you’re working in.
In the same way that you can’t build a house inside the house you’re living in, non-compete agreements are used to protect the employer from having its employees steal business or trade secrets while they’re working in their position.
Similarly, when you and your employer decide to dissolve your employment with the company, there may be certain things that you can’t do (like contact clients) for a certain amount of time after you quit or are let go.
While they are popular, non-compete agreements are difficult to enforce for many reasons, they also have a lot of different variables that make them difficult to enforce depending on who’s side you’re on. States typically frown upon employers who make employees sign these because, at the end of the day, the state does not want to limit or restrict someone from working or starting their own business. That is legally their right to do so as a person living in the state they want to work and make money in.
If you’re thinking about using non-compete agreements with your employees or business partners, it’s important to consider the following:
- Does it make sense?
- If you have a medical equipment company and you hire someone to come up with new ideas to improve this medical technology, it wouldn’t make sense to have them sign a non-compete agreement stating they can’t work in accounting.
- Is the scope reasonable in time and geography?
- Is the timeframe restriction you’re placing or the geographical area reasonable?
- For example: Are you stating that your employee can’t start a business within the Denver area for ten years after they’ve left your company? If so, that’s probably not going to hold up. If you’re buying a business and in the purchase agreement imposing a non-compete clause that states the seller cannot start a competing business within a 15-mile radius, that makes a whole lot more sense.
- Is there a legitimate business need for a non-compete?
- If you’re trying to protect your client information by having employees sign non-compete agreements, you’re going about it in the wrong way. A better idea would be to have a confidentiality agreement in place that would protect not only your clients but your business with those clients.
- If you have trade secrets, patents, exclusive resources that you don’t want getting out, that would also fall under the confidentiality aspect of the agreement.
An attorney can help you on both sides of this:
- If you’re someone who wants to have employees sign a non-compete agreement, it doesn’t hurt to have an attorney draft and/or review it to make sure it checks the factors mentioned above.
- If you’re the employee, an attorney can help you understand the applications of the non-compete agreement and future ramifications that you may oversee.