What is a Non-Compete Agreement

Legal Article

What is a Non-Compete Agreement

A non-compete agreement is a document that employers use to prohibit employees from working for the employer’s competitors during or after employment. At its heart, a non-compete agreement prevents employees from working in markets or professions that an employer considers is in direct competition with them. Non-compete agreements are also commonly referred to as Noncompete, noncompete clause, non-compete covenant, covenant not to compete. Below is a general outline of non-compete agreements, how these contracts work, what to include in a non-compete agreement, industries that commonly use non-compete agreements, and non-compete agreements compared to non-disclosure agreements.

What is a Non-Compete Agreement

A non-compete agreement is a type of contract that restricts an employee from working for a competing company or starting their own competing business for a predetermined period of time. Employers will typically require employees to sign these agreements begin they begin working or during their employment. While non-compete agreements can be enforced during an employment contract, they are most commonly utilized after an employee leaves a company.

One important note is that consultants and independent contractors who quit their jobs will normally be required to sign a non-compete agreement to avoid direct competition.

The most common reasons why employers use non-compete agreements is to protect themselves from employees revealing secrets or sensitive information about operations, clients, customers, formulas, pricing, strategy, salary, methods and practices, ideas, future products, or public relations and marketing plans.

How a Non-Compete Agreement Works

A non-compete agreement must be fair and equitable for all parties. Further, these contracts require the inclusion of the below information to be considered enforceable:

  • 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 the non-competing party will be compensated for agreeing to the terms

There are times when an employee will challenge whether non-compete agreements are actually legally binding. The unfortunate answer to this question is it depends. We will discuss one of the most common reasons why a non-compete agreement is considered non-binding will be discussed in the next section of the article.

Another important point to consider is that non-compete agreements’ validity varies depending on the state. Certain states such as California, North Carolina, Oklahoma, and D.C. have prohibited or disregard these agreements completely. However, there are a few other states that will only enforce a non-compete agreement depending on the career and industry an employee works in.

A common example of instances where non-compete agreements are used is when there are two or three companies within a city or small area that offer a similar product or service. Each company may ask their salespeople or other skilled employees to sign a non-compete agreement because the employers do not want the employees to take their talents—and client list—to a direct competitor.

Non-Compete Agreements Must be Reasonable

States that allow non-compete agreements may choose to not enforce these agreements if the employer restricts an employee too heavily. As non-compete agreements prohibit an employee’s future employment options, these contracts must be reasonable in their scope. A court is most likely to hold up a non-compete agreement if the agreement is limited in:

  • Time: The shorter a non-compete agreement is, the more likely a court is to hold up this document. Although courts have the flexibility to decide how long a non-compete agreement can be, contracts that last under two years are typically found to be appropriate.
  • Area: To be upheld in court, non-compete agreements should also be limited to a reasonable geographic area where if the employee went to a competitor, their skills could reasonably be expected to hurt the employer’s business. There is no reasonable area, rather, a reasonable area will depend on the industry in the company is in and where in the country they are located.
  • What counts as competition: Typically, employers must limit the non-compete agreement to prohibit an employee from working for a shortlist of direct competitors or from starting their own company in the same field.

As a non-compete agreement limits an employee’s ability to earn a living, companies should only ask employees to sign these documents if absolutely necessary. While different for each situation, high-level employees in certain industries may be required to sign this document while low-level employees in any industry should likely not have to hire a non-compete agreement.

Industries that Use Non-Compete Agreements

While any company could technically use a non-compete agreement, media, information technology, sales positions, the financial industry, the corporate world, and manufacturing are the most common industries that require their employees to sign a non-compete agreement. In most cases, companies in these industries that require employees to sign a non-compete agreement will be able to hold these agreements up in court.

Non-Compete Agreements Versus Non-Disclosure Agreements

There are a few distinct factors that separate non-compete agreements from non-disclosure agreements. For example, non-disclosure agreements do not prevent employees from working for a competitor. Rather, non-disclosure agreements prohibit employees from discussing information businesses consider to be proprietary or confidential, such as client lists, underlying technology, or information about products in development. 

Final Thoughts

Like any other contract, non-compete agreements have pros and cons.

The pros of non-compete agreements include:

  • Protects a company’s trade secrets
  • May reduce turnover
  • May incentivize an employer to provide costly training

The cons of non-compete agreements include:

  • Can reduce a worker’s bargaining power
  • May cause a worker to leave a field entirely, taking their expertise with them

If there is any doubt in your mind that you should require your employees to sign a non-compete agreement or you are questioning if you should sign the non-compete agreement your employer offers you, it is vital that you contact an attorney immediately. With over 20 years of experience, Antonoplos & Associates business attorneys have the knowledge and experience required to assist clients with non-compete agreement issues in DC, Maryland, and Virginia.

Contact Our DC Law Office for More Information

For more on what is a non-compete agreement, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding business law, check out our blog.