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Human Resources

What Is a Non-Compete Agreement?

Not all states allow you to have employees sign a non-compete agreement. Learn what it is and why businesses use it.

Non-compete clauses are provisions of contracts restricting an employee’s ability to work for your competitors for a specific period of time after leaving your company. State law varies on what a non-compete clause (also known as a covenant not to compete) can actually do.

Legality

Non-compete agreements are legal in most states. You should, however, take special care when drafting such a clause. If the NCC fails to pass legal muster it can bring the entire contract into question. Leave this to your legal department.

One place where NCCs are not legal is California. Nearly all agreements to not compete are automatically void in California, including contracts signed out of state. Some exceptions to California law regarding NCCs include:

  • An owner selling their business.
  • The dissolution of a business partnership.
  • The dissolution of an LLC.

Why Get an NCC?

Particularly for employees who have a lot of proprietary information, a non-compete agreement might not be enough. A non-compete agreement ensures that your employees don’t leave your company for a more lucrative offer. Further, it prevents terminated employees from taking their knowledge and expertise to the competition after you let them go. An NCC can be difficult to get an employee to sign in some cases, but if your promise a lucrative severance package you can offset some of the employee’s fears about not being able to find gainful employment after leaving your company.

Ex-Employees, New Businesses

When you terminate an employee or he leaves your employee, the NCC applies. NCCs generally have a time limit on them, stating how long your employee is not allowed to compete. This clause applies even to employees who start their own business after leaving your company. When your former employee starts a new business and begins competing against you, he is in violation of the NCC and you have cause for civil action.

Concerns When Drafting an NCC

As with any clause, there are legal concerns specific to an NCC. To make sure that your NCC passes legal muster, make sure that it is specific with regard to scope and duration. In a worst-case scenario, an NCC drafted too broadly will be thrown out by the courts. In other situations, the courts will rewrite the clause to bring it in line with broader statute.

Legal Recourse for a Violated NCC

If a former employee violates an NCC you have no choice but to bring civil action. The law in most states allows you to receive civil damages, as well as an injunction preventing your former employee from engaging in further business violating the NCC. Courts have also extended the period of NCCs for businesses and individuals who violate them.

Signing an NCC After Employment

In most circumstances you can get an employee to sign an NCC after he has been in your employ for some time. You must give your employee something of value to make the NCC valid, however many courts consider additional employment for non-contracted employees to be sufficient value for an NCC.

Protect Your Company With an NCC

To protect your company from competition and infringement of your intellectual property rights, it might be necessary to have employees sign an NCC. NCCs are increasingly common these days and most employees will have little trouble signing them. If you are trying to recruit someone who is reticent to sign an NCC, sweeten the pot with a lucrative severance package. At the end of the day, you will rest easier at night, making it well worth the extra cost.