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WHAT IS A NON-COMPETE AGREEMENT?

A non-compete agreement is a legally-binding contract between an employee and an employer where the employee agrees he/she will not enter into a business or partnership that competes with the employer during or after employment.

The non-compete agreement prevents an employee from using the knowledge, experience and intellectual material from a company he/she was employed but to set up in direct competition.

When does a company use a non-compete agreement?

A non-disclosure agreement is usually signed during employment and a non-compete agreement is usually signed once employment has been terminated; either by the employer or the employee has resigned.

Independent contractors, freelance agents and consultants are often asked to sign a non-compete agreement which acts in a similar way to a non-disclosure agreement, and prevents them from using the knowledge and information they’ve obtained while contracted to a company to set up a similar business in direct competition.

How long does a non-compete agreement stand?

A non-compete agreement comes into effect from the date an employee leaves a company or a consultant or contractors services are terminated, and stands for an agreed period of time. An employer is expected to impose a realistic timeline and cannot permanently prevent a former employer, consultant or independent contract from continuing in that line of work with that knowledge, expertise or intellectual capital.

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Is a non-compete agreement legally binding?

A non-compete agreement is a legally binding document but it is often enforced, and often contended in a court of law. It varies from state to state but a non-compete agreement is limited in terms of how restrictive it is and it’s scope. In other words, the radius of the region it applies to and what industries it applies to.

Basically, a non-compete agreement cannot restrict a former employee, consultant or contractor from earning an income. It has to be reasonable, there has to be a clear definition of what an employer construes as competition and a timeframe must be applied.

In some states, non-compete agreements are illegal and unenforceable. They may be allowed if the restrictions are limited and designed more to protect confidential information or trade secrets. It’s recommended that you check with a lawyer what is allowed and not allowed in a non-compete agreement before drawing one up and forcing an employee, consultant or contractor to sign it.

What is included in a non-compete agreement?

A basic non-compete agreement covers the following:

  • an effective date that the agreement takes effect
  • a plausible reason for enforcing a non-compete agreement
  • what is construed as ‘not competing’; in other words, contacting customers, working in the same area, setting up a competitor business etc.
  • a specific timeframe in which the individual is prohibited from working in what an employer construes as a competitive environment or location
  • whether the non-competing party will be compensated

Difference between a non-compete agreement and restraint of trade

A restraint of trade is an element of a non-compete agreement. It basically restrains a former employee from pursuing a trade or profession in the same geographical area or with a company’s direct competition. The employee may or may not be offered compensation to not work in a similar position in the same geographic area for a prescribed period of time.

Again, a restraint of trade cannot be restrictive and unreasonable. In some states, they are illegal based on the premise that a person cannot be prevented from earning an income where he/she only possesses skills for that particular job.

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