How to Create a Non-Compete Agreement
As a small business owner, you've invested a lot into your ideas – so much so that having new employees sign non-compete agreements seems almost second nature. In a business climate where the average length of employment is relatively short, why wouldn't you take extra measures to protect your trade secrets and your talent pool? By signing a non-compete agreement, an employee promises not to work for a direct competitor for a specified amount of time after he or she leaves your company. Here's five questions to ask yourself before bringing non-compete agreements into your company.
Why Have an Agreement?
At first glance, non-compete agreements make a lot of sense. Why would you want to make it easy for your employees to jump shark and work for your competitor? If the goal of the agreement is to protect proprietary information, a non-compete agreement may not be necessary. Instead, you should consider a confidentiality agreement – a kind of agreement that protects your company's personal information, yet doesn't restrict or keep your employees from searching for another job.
What State Do You Live In?
Even if you work remotely from a virtual office, you still must abide by all local and federal laws. In some states, like North Dakota and Oklahoma, non-compete agreements aren't enforceable. The state of California takes it a step further – not only are non-compete agreements unenforceable, but an employer who requires employees to sign non-compete agreements can be sued. If you live in the state of California and are still interested in protecting your trade secrets and client lists, you can ask your employees to sign non-disclosure and non-solicitation agreements instead.
Is It Reasonable?
Because non-compete agreements limit an employee's future options, they must be reasonable in scope. The shorter an agreement is, the more likely a court is to find it reasonable. Generally speaking, an agreement that ranges from six months to two years is generally considered to be reasonable, while anything longer will be met with scrutiny. Similarly, non-compete agreements shouldn't cover too wide of a geographic area or prohibit a former employee from engaging in too many types of businesses.
Are You Prepared to Answer Questions?
If you decide to include non-compete agreements as part of the onboarding process, you must be prepared to answer any and all questions an employee may have. You should know in what cities and counties the agreement applies to, which companies an employee is not allowed to seek employment with, how long the agreement lasts, what happens if the company is sold or the employee is laid off, and if you'd be willing to negotiate certain terms of the agreement. If you're not prepared to answer these questions right off the bat, you may wish to reconsider a non-compete agreement or become better versed with the restrictions you intend to implement.
Will There Be Exceptions?
While non-compete agreements can be a valuable asset for your company, they come with their own set of problems. For example, if you introduce the contract to employees who have been loyal to your company for the past five years and they refuse to sign, will you terminate them? In doing so, you'd be doing nothing more than causing the loss that the agreement was meant to avoid in the first place. Do you refuse to hire a star player who refuses to accept an employment offer that comes with a non-compete agreement?
The answers to these questions require a great deal of reflection. If you're still interested in the possibility of incorporating non-compete agreements in your company, get feedback from management and the human resources staff, in addition to legal counsel.
