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A non-compete agreement (NCA) (or a non-compete clause) prevents another party from starting or working for a similar business or new employer that could compete with yours or threaten its market share. In some cases, restrictive covenants may only apply to a certain geographic radius or region (referred to as geographic scope) and may only last a certain amount of time. These documents may be referred to as non-competition agreements or noncompete contracts and are often used along with a nondisclosure agreement.
Recent data suggests that around 20% of the United States workforce are bound by non-competes, including 14% of those earning less than $40,000 per year.
This guide covers everything you need to know about non-compete agreements (NCAs) or clauses. We explain what they are, when you need one as an employer, the legal guidelines for NCAs, whether an employee or contractor should sign one, the pros and cons of NCAs on the economy as a whole, and more. After reading this guide, you’ll have all the knowledge to confidently move forward.
CNCs typically refer to three different types of NCAs. Those are:
Before you expose an employee or contractor to the intricate workings of your business, it’s a good idea to have them sign an NCA or to include one it the work contract. It's much easier to do this before the employment relationship begins because they do not apply to past actions or exposure to information; they take effect on the present date or a future date and continue for a specific amount of time into the future. For maximum protection, you should make executing this document a priority.
Here’s a simple question to help you determine whether a business should offer a full non-compete or clause:
Will the employee or contractor have access to proprietary information?
If so, it's advisable to consider completing a non-compete. If not, non-competes may not be necessary. To know for sure, you can always consult with a lawyer who specializes in business.
If you own a business in Texas, you should know that most NCAs (also referred to as a covenant not to compete) are illegal. Utah restricts the time limit to one year. North Dakota enforces them only in very limited circumstances. California law states that NCAs are void.
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 or clause in place. Non-compete agreements, enforceable against employees and contractors in most states, may protect your business from people who cheat. By that, we mean employees or contractors who leave your company and immediately start a competitive business of their own using your hard-won trade secrets. A non-compete clause protects your business, but it’s not a stand-alone agreement. It is a single clause that is placed inside of an employment or service contract.
The main components of a stand-alone NCA include:
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”). In a non-compete clause, you’ll likely just reference the parties by name as through the rest of the contract the clause is placed within.
Duration and Geographic Range of Agreement
Most non-compete agreements have limited lifespans. The lifespan is based on local law. You’ll also need to list the date that the document becomes effective. 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 in the eyes of the law.
Details of the NCA
This is a sticky subject, legally speaking. In fact, if you get stuck, you should speak with an employment lawyer for help. Since most courts rule in favor of an employee’s or contractor’s right to make a living, you can only really protect legitimate business secrets. Something else to keep in mind is that the court will not enforce something it considers to be against public policy, either. So, break down the most important cornerstones of your company’s plan for success. What methods is an employee prohibited from adopting? What businesses may they not go into or work for under the terms of the agreement? Are there particular clients that they must avoid soliciting for a certain amount of time? There is no need to provide 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 receive compensation. If the party is a new employee or contractor, the job itself is usually enough. However, if it’s an existing employee or contractor, compensation may take the form of a promotion, pay raise, or a one time cash payment or installments. Installments may be paid in any interval you choose, whether it is by the hour, by the month, or by the year.
You must explain the consequences of violating the agreement. If you're not sure on the legalities, talk with an employment attorney. It details what the employer is entitled to receive should the other party break the rules of the non-compete agreements or clause. Often, these will take the form of a financial settlement or undesirable legal consequences.
Like any legal document, a non-compete agreement is not legal without the signatures of all involved parties.
State law dictates the enforceability of non-compete agreements and clauses. Often, non-competes are unreasonable and can harm employees and contractors far more than they protect businesses. It is imperative you familiarize yourself with your state’s non-compete laws. Without a good understanding of them, you may be unable to enforce the terms. To enforce your non-compete, you’d first review the terms of the agreement. Did you agree to mediation or arbitration? Did you agree on a specific state to file a lawsuit? That’s the starting point. You would also want to talk with a lawyer to ensure that you’re properly exercising your legal options.
Non-competes can severely inhibit a worker’s ability to earn a living. Because of this, states have legislation that limits the scope of non-competes. However, the degree to which states limit the scope of non-competes varies widely. We mentioned the specific state restrictions earlier in this guide.
Given the wide-range of state variation on these matters, we recommend you consult an attorney regarding your state’s laws before creating, or signing, a non-compete.
The most common scenario for NCAs is when employers offer a worker a new job or promotion. If you are offered a new job and asked to sign an NCA, remember the following:
Non-competes are designed to protect the proprietary information of employers, but what about employees and contractors? How do workers ensure their own ideas are not taken by their employer, or a competitor, without proper compensation? Follow these tips:
Establishing mutually beneficial relationships with competitors is one of the best ways to protect your ideas.
Any worker in a creative field is likely to come across an NCA at some point in their career. Consider these tips during negotiating:
Our team at FormSwift wanted to determine which US states foster employee innovation the most and least. We created a state ranking by evenly weighting the following factors into a final score out of a base 100 points. These factors include: the number of employees in each state that sign non-compete agreements (based on the top five industries nationally in which employees must sign NCA's). whether each state can enforce non-compete agreements on workers fired without cause, the rate of new entrepreneurs and the rate of startup growth.
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