One of my clients, the CEO of a mid-sized business, was recently requested to sign a non-compete agreement in connection with a business deal. “Should I sign it,” I asked him during a drink at a recent gathering. “And what if I don’t,” he said.
“Do you possess a great lawyer? “I said.
What is a non-compete, and what is it covering? What are the most important things to know about a non-solicitation contract?
If the economy is growing with top talents difficult to come by, many businesses opt out of them, as their absence makes it difficult to recruit individuals. Just as prenuptial agreements and marriage in the end – whether for good or bad and until the end – non-compete agreements are here to stay.
There aren’t many commercial contracts that don’t contain some form of the non-compete agreement, and most deal with the sale of a company or cover partnerships and employment agreements. Here are some facts you need to know about non-competes.
What Does “Compete” Mean?
A standard non-compete bans you from working as an employee or officer, consultant director, owner, principal, lender dealer, partner distributor, or contractor. It also prohibits you from being a representative, trustee, broker, or other representatives of a competitor company. Certain non-competes even bar you from investing in the company of a competitor.
Reasons For a Noncompete.
In an employment contract, the addition of a non-compete clause protects employees from departing from the company and stealing customers (and company data) to fund their new venture.
A non-compete during the event of a business sale is intended to stop the previous owner or key executives from establishing an alternative business across the street and taking over those business clients. A non-compete could also be part of an arrangement for the same purpose in order to stop an ex-partner from starting an unrelated business.
Restrictions in a Noncompete.
A non-compete agreement places three kinds of restrictions:
1. Time – A non-compete prohibits individuals from opening a rival company within a specific time frame.
2. Distance – A non-compete also prohibits a person from opening an alternative company within a specific distance of the company.
3. The type of business a non-compete can also bar businesses of similar types from competing against former companies
In most cases, the non-compete agreements are not easy to enforce as they can restrict the individual from being a business owner and earning a livelihood. The issue of reasonableness is decided by the courts of law, arbitration, or mediation. Furthermore, it is taken following the laws of a particular state because state laws are different, so the outcome might not always be guaranteed.
Non-competes against. Agreements on Nonsolicitation, Nondisclosure, and Contracts.
If you don’t want someone walking through your door with valuable information regarding your business, You can secure yourself from unauthorized disclosure and non-solicitation agreements that courts usually recommend.
As opposed to a non-compete one, a non-solicitation contract prevents the former employee or partner from contacting customers or employees of the company that they left. Nondisclosure agreements prohibit present or former employees from disclosing confidential information about the company. A lot of contracts include non-compete, non-solicitation, and nondisclosure agreements.
Enforceability of Noncompete Agreements Differs From State to State.
The extent to which a court can restrict an employee’s rights to pursue employment with another company will depend on the state’s laws that apply in the case, as stated in an article from SHRM Online, from which most of the information here is derived.
For instance, in California, non-compete agreements are unlawful. There is a law that states that employers are not able to apply their terms. However, in Ohio as well as New York, they are frequently applied. Georgia has been described as “somewhere in the middle” in that it enforces non-competes under more strict standards than other states.
In Texas the state of Texas, these agreements were not enforced for several years; however, since October, they will be implemented “if done right,” in the same article.
One Size Does Not Fit All.
Non-compete agreements should be “distinguishable” from standard business contracts. In the absence of fraudulent or untrue influence, they are usually executed in writing.
The first aspect to consider when you draft non-compete agreements is to think about the specific employee. What are you worried about the person’s conduct when the time comes to leave? No matter what you think is in your company’s best interest, draft an appropriate and legally binding non-compete.
Ask Questions When Hiring.
In addition to the increasing number of lawsuits brought from companies who want to enforce agreements, there’s also been an increase in businesses being accused of hiring employees who violated agreements that former employers drafted.
If you’re a hiring company, you must be sure to inquire with the candidates you’re thinking of hiring if they’re subject to non-compete restrictions. (It’s an issue we’re always asking applicants to inquire about on behalf of clients.) It is important to determine if hiring a person could expose you to lawsuits.
Protect Your Assets.
A legally-drafted agreement tailored to the law and specifics of your company is the most likely to have the best chances of being legally legal and binding. To ensure your company’s assets, speak with an employment law attorney before contemplating an agreement to not be competitive.