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What Is a Non-Compete Agreement?

When an employee leaves your company, your intellectual property is at risk. Protect your business interests with a non-compete agreement.

Posted by Ann Snook on September 25th, 2019

It’s every business owner’s worst nightmare.

You work hard to come up with unique business ideas and to build your client list, only to have a competitor get ahold of them. When an employee leaves your company to work with a competitor, they may share your proprietary information, knowingly or not, with your competitors. That’s why you should require every employee to sign a non-compete agreement (NCA).

 

Add a non-compete agreement to the end of your employee handbook to protect the best interests of both employer and employee. Get started using our free employee handbook template.

 

What is a Non-Compete Agreement?

 

Investopedia defines a non-compete agreement as “a contract wherein an employee promises not to enter into competition of any kind with an employer after the employment period is over.” In addition, “these agreements also prohibit the employee from revealing proprietary information or secrets to any other parties during or after employment.”

In other words, it’s a legally-binding agreement stating that the employee will not work for a competitor in any capacity after they leave the company, even if their position would not involve sharing trade secrets. Starting a new business using proprietary information or soliciting the business of other employees or clients are also prohibited under an NCA.

Non-compete agreements apply during and after the employee’s time with the company. While some types of agreements change based on how an employee leaves the company, an NCA is valid whether the individual leaves freely or is terminated.

NCAs are signed at the beginning of a business relationship by both the employer and the employee. In addition to full-time employees, independent contractors and consultants may also be asked to sign a non-compete agreement.

Some companies may refer to a non-compete agreement as a covenant not to compete or a restrictive covenant. They are distinct, however, from non-disclosure agreements (NDAs). An NDA only prevents the employee from disclosing business-related information, not from working with a competitor.

 

RELATED: Common Mistakes That Will Ruin a Non-Compete Agreement

 

What to Include in an NCA

 

When writing a non-compete agreement, make sure you’ve covered all your bases. Detailing all the important terms make the NCA more enforceable and easier for all parties to understand.

Here are some of the sections you need to include:

  • definitions and examples of confidential information, intellectual property and proprietary information
  • length of the agreement, including the date it will take effect
  • geographic restrictions of the agreement
  • restricted business actions (such as sharing confidential information and working for a competitor)
  • market or industry the employee is restricted from working in
  • a non-solicitation clause
  • an acknowledgement of the law(s) the NCA is governed by

 

Need help getting started? Use our free non-compete agreement template.

 

How to Write a Non-Compete Agreement

 

Because laws surrounding NCAs differ between states and countries, enforcing them can sometimes be a challenge. For example, non-compete agreements can’t be enforced in North Dakota or Oklahoma and aren’t allowed at all in California. In Hawaii, high-tech companies can’t use NCAs, while in Utah their restriction limit is one year.

When writing your agreement, keep in mind the laws in your state and always consult a legal professional before signing it. If your company is headquartered in one state but the employee works in another state, you may be able to choose which state’s laws will govern the NCA. Seek legal counsel for complex situations like these.

In addition to following the applicable laws, make sure that the terms you set for the NCA are realistic. The timeline of the agreement shouldn’t permanently prevent the employee from finding employment in an industry. Time and location restrictions should be just strong enough to protect your business interests.

 

RELATED: What Do You Get When You Mix Independent Contractors and Non-Competes?

 

Who Needs an NCA?

 

Companies of every size, in every industry, can benefit from non-compete agreements. For example, a tech company would require a non-compete agreement to protect their ideas and innovations. Medical facilities use NCAs to keep physicians from taking patients with them if they move or from opening their own practice nearby.

Any company that has trade secrets, intellectual property or other business-related confidential information should ask employees to sign an NCA. Businesses that form close customer or client relationships should use non-compete agreements to retain those clients. In short, if you want to be a competitive force in your industry, consider protecting your business interests with an employee NCA.

 

Do you suspect an employee has broken their non-compete agreement? Download our eBook to learn how case management software can help you protect your brand.


Ann Snook
Ann Snook

Marketing Writer

Ann is a marketing writer at i-Sight Software. She writes about issues related to investigations of fraud, employee misconduct, corporate security, Title IX, ethics & compliance and more.

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