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A Non-Compete Agreement, also known as a Non-Compete Clause, is a contract in which one party agrees not to start a business in the same field as another party. This agreement is very common with employees of a large companies. The clause will prevent the employee from leaving the company to compete in the same industry as the former employer.
A Non-Compete Agreement may be included in another document or it can be its own separate form. The form will require information about both parties. It will also require the field that is being discussed. It may include information about the target consumer base for better clarification of the field that the party will be unable to compete in.
Most Non-Compete Agreements will be used in a certain state or for a certain geographical area, so the clause should include the area in which the party cannot create a competing business. This could be a small surrounding area, an entire state, or even multiple states, depending on the particular circumstances of the situation.
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Hey. Are you a new entrepreneur? Are you currently hiring a bunch of Type-A, entrepreneurial employees? Ambitious people can work together well, but only for a certain amount of time. The economy is in trouble, and competition is at an all-time fierceness. Unless your business is already booming, you’ll want to have a solid non-compete agreement in place.
It’s easy to simply jump on the web and fill out a free non-compete agreement template on a website. But how exactly will your non-compete agreement work legally? There are a few major issues you have got to keep in mind when drafting your non-compete agreement.
Make it Document Number One
Before you expose an employee to the intricate workings of your business, it’s a good idea to have him or her sign the no-compete clause. Non-compete clauses do not apply to the past; they take effect at a present or future date and go from there. For maximum protection, you should make your non-compete agreement a priority.
Don’t be shy about using templates
There are plenty of reputable web sites that offer free non-compete agreement templates that one can download and fill out. This method erases several steps for you, as the organization and formalization of the document are already taken care of. All you need to do is prepare and enter the information, and you’re all set.
Include all details
Vague language is a terrible parent. It can’t protect anything. Unless you outline the details of what your associate needs to do or not do, your non-competition agreement is basically useless. Be sure to provide details of limitations, such as the duration of the agreement and the geographical area to which it applies (you can’t generally apply a non-compete agreement to the entire world, forever.
Also called a “consideration,” this is whatever you pay your associate to keep the non-compete agreement intact. In the case of a new employee, such a payment can be as menial as a job offer. On the higher levels, it can mean a lot of money. Be sure that you evaluate how much your captive market is worth to you and structure your agreement accordingly.
If you’re starting a business in food, apps, publishing, or any other competitive industry, it is particularly important to have a non-compete agreement in place. Non-compete agreements, enforceable against employees in most states (with California being a notable exception), protect your business, essentially, from employees who cheat. By that, I mean employees who leave your staff and immediately start a competitive business of their own using your hard-won trade secrets.
Doesn’t the thought make you cringe? Even if as of yet you have neither employees nor trade secrets to spill, I recommend you get cracking on the main components of your non-compete agreement. I’ve outlined the most important points below -
Naming of parties involved
This is pretty straightforward. Include the full legal name and address of your business entity (the “Protected Party”) and the full legal name and address of the employee signing the agreement (the “Non-Competing Party”).
Duration and geographic range of agreement
Most non-compete agreements have limited lifespans. On what date will the agreement come into effect? For how long following an employee’s departure will the agreement apply? You must also specify the area across which the agreement applies, such as “the State of Oregon” or “within 40 miles of Boston city limits.” The restrictions are only enforceable if they are "reasonable". This is a subjective standard, meaning resonability may vary depending on the situation. Keep in mind your particular situation, and what restrictions will reasonably protect your interests.
Details of “non-competition”
This is a sticky subject, legally speaking. Since most courts rule in favor of an employee’s right to make a living, you can only really put a cork in concrete business secrets. Break down the most important cornerstones of your company’s plan for success. What methods is an employee prohibited from adopting? What businesses may he or she not go into under the terms of the agreement? Are there particular clients that he or she must avoid soliciting? There is no need to name specific names, but the types of businesses and practices to avoid must be clearly defined.
In order for the agreement to be legally enforceable, the Non-Competing party must be compensated. If the party is a new employee, often the job itself is enough. However, if it’s an existing employee, compensation may take the form of a promotion, pay raise, or straight cash. If it’s the latter, you can pay the employee either in a lump sum or in installments. Installments may be paid in any interval you choose, whether it is by the hour, by the month or by the year.
Here’s where you lay out the consequences of violating the agreement . It details what the employer is entitled to should the employee break the rules of the non-compete agreements. Often, these will take the form of a financial settlement or undesirable legal consequences.
Like any legal document, a non-compete agreement is not technically legal without the signatures of all involved parties. This means that the agreement must be signed and dated by both the Non-Competing Party and the Protected Party.
Think you don’t have much in the way of business secrets? I’ve got news for you - if yours is a new business, those little strategies you’ve been implementing here and there? Someday, those may become big. I mean, you just don’t know. The market is a wild world, always changing. The risks you take and the moves you make can pay off in unexpected ways.
For this reason, it is crucial that you keep your data, model and strategies confidential. If you do not adequately protect your information, pretty much anyone can waltz in, snap it up and apply it in a competitive venture that effectively kills your business. Which brings me to the subject of the non-compete agreement, or non-compete clause. A no-compete clause is your single most effective legal defense against this sort of professional piracy . Here are a few legal details to keep in mind when drawing it up.
Check your state laws
First things first – be sure your non-compete agreement is legal in your state! Some states, such as California, only allow non-compete agreements in the case of the sale of a business. Some states impose specific time and geographical limits to restrictions.
Figure out exactly what you need to protect and state it concretely. Some no-compete agreements ask that employees not use X, Y or Z forms of information within G amount of time. Others are broader, prohibiting associates from opening a similar business or beginning any venture within that industry within a certain area and time period. For
Set a time limit
You can’t very well ask an ambitious associate to internalize your business secrets and then ignore them for the rest of his or her life. Not unless, of course, you are as rich as Donald Trump. For the most part, non-competition agreements have limited timespans as well as geographic areas. Your job is to choose your area and timespan. For example, if you run a stationery store in Seattle, you can get your employee, Richard Pritchard, to sign an agreement stating that he would not open a stationery or art supply store within 100 miles of Seattle city limits.
Make sure your associates sign it right away.
Your non-compete agreement is going to apply to a definite period in time. You cannot ask an employee to sign a promise that applies partially to the past.
Keep an eye on the situation.
Remember, if a former associate breaks the rules of the no-competition agreement, you are the one who will have to speak up about it. The non-competition agreement is a legally binding document. Don’t be sheepish about embracing its power and getting confrontational if necessary.