Human Resources Legal

Top 10 Mistakes with Non-compete Agreements

Many businesses enter into Non-Competition Agreements in order to keep employees from using valuable trade secrets in the service of a competing firm. These agreements can provide some peace of mind, but too often they cannot actually be enforced, or do not protect the business in the way they need. If you cannot enforce your agreement, it is not useful to you. This article will take you through ten common mistakes we’ve seen in making Non-Competition Agreements.

1. Consideration

A Non-Compete is only enforceable if it includes consideration, which is a legal term meaning an exchange of value. In other words, the employee must receive something of value in return for signing the Non-Compete. When you are hiring a new employee, the value might be your willingness to hire them after signing the agreement. This qualifies as consideration. If you are having an employee sign a Non-Compete after hiring, you must provide something else of value, such as a raise, promotion, benefits, or change in employee status. It doesn’t have to be huge, but you do need to offer something of value to the employee who is signing the agreement for it to be enforceable.

2. One Size Fits All

Non-Competes should be crafted for specific businesses, industries, and employees. Adapting an agreement from a different industry could lead to highly unreasonable standards. Even between employees at the same company, the agreement may need to change in order to be reasonable. Tailor your agreement to your business, and make sure it follows the regulations of your specific state.

3. Area of Restriction

Some Non-Competes are not enforceable because they are restricting across too great of a geographic scope. The agreement should restrict the employee within a certain mile radius of the business headquarters, or in certain cities or counties. Worldwide restrictions are often not enforceable, though the reasonable area is determined based on the specific business and industry. Legal advice can be extremely helpful in determining what is considered reasonable in your specific case.

4. Length of Restriction

Some Non-Competes restrict the employee for an unreasonable length of time, which can make the agreement unenforceable. It is highly unlikely that a court will enforce an agreement affecting the rest of the employee’s life. Six months is typically seen as reasonable in many industries. In general, a Non-Compete should restrict the employee for the amount of time it will take the business to protect their interests, so there is some variation based on the pace of each industry. Legal advice can be highly valuable to specific companies looking to set a reasonable restriction length.

5. Purchase of Business

If you purchase a business, be sure to secure a Non-Compete from the owners and key personnel of the selling business. This protects you from finding the sellers in direct competition with you in a matter of months. A Non-Compete is especially important if these individuals have relationships with clients, knowledge, or skills that could make them threatening to your business.

6. Assignation

Be sure to include a provision in your agreement that allows you to assign the Non-Compete. Without this provision, Non-Competes could become null in the event you sell the business. Employees will have to consent once again to the assignment of their Non-Competes. The purchaser could be unable to enforce Non-Competes without an assignation provision.

7. Law Provision

Every Non-Compete agreement must state which jurisdiction’s laws will preside over the agreement. Only by noting this can you ensure that your agreement follows the laws of the state in which it will be enforced. Legal remedies and regulations vary from state to state. If your business operates in multiple states, you must write in the agreement which state will govern over the Non-Compete.

8. Updating

As your business changes, your Non-Competes should change. What is considered reasonable at one time may no longer be reasonable if your business’s scope of work changes significantly. You may need to update what exactly about your business must remain confidential as you gain new relationships, methods, and knowledge. Stay on top of changes in state laws, and update your Non-Competes based on these changes.

9. Magic Wand

A Non-Competition Agreement is not a magic wand that can fully protect your company from any leaking of confidential information. They may allow you to take action if this happens, but employees can always violate Non-Competes. These agreements are an excellent step at protecting your company, but they are not the only measure you need to take. Rather, they are one tool of many that you can use to protect your confidential information.

10. Skipping the Agreement

Of course, the worst kind of Non-Competition Agreement is no Non-Competition Agreement. Many businesses can benefit from Non-Competes, but don’t bother with the process due to stress or a belief that their employees won’t leak confidential information. Consider whether a Non-Compete could help you protect your business and secure your confidential knowledge and strategies through your company’s long future.

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Author: Justin Cutler
Justin is the founder of J. Cutler Law and co-founder at Turbo Wills—a do-it-yourself Estate Planning website providing everything necessary to complete a legally enforceable Estate Plan entirely online. As a business.... read more
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