What is a Non-Compete Agreement?

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A non-compete agreement is a contract between an employee and an employer, where the employee agrees not to enter into competition with the employer after s/he terminates employment.

What is a Non-Compete Agreement?

Non-compete clauses (also known as NCCs) are legal contracts in which an employee agrees to avoid or not enter into markets or professions considered competitive with the employer. Employers use non-compete agreements to prevent any possibility of a terminated employee working for a competitor or opening up another competitive business.

Why Employers Use Them

Non-compete agreements are enforced when a relationship between an employer and employee ends and the employer wishes to prevent the employee from competing against them in their next employment, whether that be working for a competitor in the same market or opening up another business in the same field. Consultants and independent contractors who terminate their relationship with a company are often subject to non-compete clauses to avoid competition after the separation. 

Employers may also seek non-compete agreements to protect themselves against former employees revealing secrets or sensitive information about the employer's trade, operations, clients, customers, formulas, pricing, strategy, salary, methods and practices, ideas, future products, or public relations and marketing plans. 

Duration

A non-compete agreement is typically in effect for a certain period of time after employment ends.

It is important to determine these dates well in advance and to seek legal counsel, as employers can only set NCCs within a realistic timeline and cannot permanently prevent someone from furthering their careers in that field.

Legal Validity

There are issues regarding whether non-compete agreements are legally binding.

There isn't a simple answer. It varies from case to case, and can depend on state law, on how restrictive the agreement is (how much limits someone from working in their field or location), and on what the employer construes as competition.

NCCs are usually considered legally binding as long as the agreement has reasonable limitations such as a clear, realistic region where the employee may and may not work or an exact amount of time that must pass before an employee may commence work in the field again. 

However, the validity of non-compete agreements varies by state. Some states disregard these agreements altogether while others pick and choose which careers prove more risk for a company and, therefore, can be subject to such an agreement.

What is Typically Included in a Non-Compete Agreement?

Non-compete agreements overall must be both fair and equitable for all parties.  NCCs require certain information in order to be considered legally binding:

  • The agreement must include an effective date on which the agreement will begin
  • A reason for enacting the agreement
  • Specific dates during which the employee will be barred from working in a competitive sense and the location covered by the agreement.
  • Details as to how to the noncompeting party will be compensated for agreeing to the terms.

Also Known As: Non-compete, non-compete clause, non-compete covenant, covenant not to compete

Examples: 

  • Amarella signed a non-compete agreement when she started her software development position at XYZ company.
  • The non-compete agreement that Robert signed was deemed invalid by a California judge.
  • Jasmine asked to speak to her attorney before signing a non-compete clause that bound her to never work for another company in the field.

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