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Every business requires significant investment growth. Thus far, you have nurtured your employees’ skills beyond training by sharing your company's intellectual property, trade secrets, and other confidential information.
When expanding to new regions, you will encounter business challenges in hiring and managing new employees and must be prepared to face the consequences of terminating them.
This is especially true because when employees leave, they carry company insights gained during their tenure.
This knowledge could benefit a competitor without legal protection, potentially undermining your business.
Fortunately, courts allow you to include a reasonable non-compete clause in the employment agreement to protect your business interests.
In other words, a non-compete employment contract prevents employees from using your company's intellectual property to gain an unfair advantage even after termination.
Let’s understand how the non-compete clause works in the following sections.
Understanding the Growing Importance of Non-Compete Clauses
Non-compete agreements in jobs maintain stability and trust in an employment relationship while allowing professionals to grow within a framework of mutual respect.
Let us explore the purpose of such non-compete clauses with an example.
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Talk to an expertWhat is a Non-Compete Clause?
A non-compete clause in an employment agreement is necessary to protect business interests and proprietary information.
Usually, non-compete, non-solicitation, or confidentiality clauses fall under non-compete restrictions meaning employees are legally prohibited from engaging in certain business activities or working for a competitor after termination.
You could consider the following example of non-compete clause and seek restriction for 12 months after the employee’s termination to not engage in or provide similar services for anyone directly competing with your business within a 50-mile radius.
Additionally, they agree not to solicit any current clients or employees of your company during this period.
Definition
According to Black’s Law Dictionary, a non-compete agreement is:
“A promise, usually in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer. Noncompetition covenants are valid to protect business goodwill in the sale of a company. In employment contexts, requiring the employee, after leaving the employment, not to do a particular type of work, they are disfavored as restraints of trade. Courts generally enforce them for the duration of the relationship, but provisions beyond that relationship must be reasonable in scope, time, and territory. Also termed noncompetition agreement, non-compete covenant, restrictive covenant, covenant in restraint of trade, promise not to compete; contract not to compete.”
Moreover, the enforceability of non-compete clauses is in drafting an employment agreement containing:
- Duration of Restriction: Specifies how long the former employee must refrain from working with competitors.
- Geographic Limitation: Outlines the areas or regions where employees cannot work in similar roles.
- Scope of Restriction: Defines the types of activities or services restricted, such as working with direct competitors or starting a similar business.
Purpose
- Keep proprietary information, like processes or product designs, confidential.
- Prevent former employees from using insider knowledge to benefit a rival.
- Stop former employees from taking clients to a competitor or their own business.
- Deter competitors from hiring employees who are trained and skilled using your resources.
- Safeguard your brand reputation and goodwill by defining a legal framework for growth & innovation.
Key Components of a Non-Compete Clause
In a non-compete agreement, the term "ancillary" means that the non-compete clause is necessary yet a supporting provision to a larger agreement, like an employment contract or a business sale agreement.
To be considered valid, an ancillary non-compete clause must generally meet the following criteria:
Legal Landscape: How Non-Competes Are Governed & Are Non-Compete Clauses Legal?
The legality of non-compete clauses in the United States is constantly evolving. While the Federal Trade Commission (FTC) has banned non-competes nationwide, it is not enforceable in every state. Moreover, you may face penalties in ten states for enforcing non-compete clauses:
Ethical and Practical Considerations: Balancing Employer Protection with Employee Mobility
Are non-compete enforceable? This question also raises ethical concerns about restricting employee freedom and fair competition.
Safeguarding your business interests
- Protects resources invested in training employees.
- Help prevent employees from leveraging established relationships with clients or customers to benefit a competitor.
- Keep client trust and prevent poaching.
- Offer stability during transition, such as mergers, acquisitions, or significant organizational changes.
Impact on career opportunities
- Severely limits job options in the industry.
- Restricts employees from innovating, applying skills, or creating new ventures.
- Reduced mobility contributes to a stagnant labor market, which, in turn, lowers employees' negotiating power for better pay.
Alternatives to Non-Compete Clauses
The FTC's final rule to ban non-competes is estimated to boost the economy by creating over 8,500 new businesses annually, leading to higher wages, lower healthcare costs, and increased innovation.
However, you can protect your business interest and confidential information through other competition clause contracts. Some effective alternatives to non-compete clauses include:
- Non-Disclosure Agreements (NDAs): These agreements protect confidential information without restricting your employee's ability to work for a competitor.
- Non-Solicitation Agreements: These agreements prevent your employees from soliciting clients, customers, or employees of the former employer for a specific period.
- Trade Secret Protection: Robust trade secret protection laws can help safeguard valuable intellectual property without overly restrictive non-compete clauses.
- Clawback Provisions: You can implement clawback provisions to recover costs associated with employee training or development if the employee leaves for a competitor.
Moreover, you can initiate a strong company culture by providing competitive compensation and timely benefits to retain talent without relying on restrictive non-compete agreements.
Common Mistakes Employers Make with Non-Compete Agreements (and How to Avoid Them)
Most businesses often search for a cost-effective way out of legal troubles in a global expansion spree. Here are some considerations when drafting and enforcing non-compete agreement in job contracts to avoid legal challenges and potential penalties:
- Any non-compete agreement should be tailored to the specific role and level of the employee. However, you may have vague conditions or extensive limitations on time, geographic scope, or scope of work on employees’ practice after termination.
Moreover, you may use a generic agreement that is overly restrictive or insufficient to protect your interests. Most courts may deem it unenforceable.
For example, in Wisconsin, the legality of non-compete clauses is upheld only if reasonable.
- You may miss out on state-specific non-compete laws and regulations.
- You may ignore the “at-will” employment doctrine, meaning either party can terminate the employment relationship without cause. You should avoid using non-compete agreements to coerce employees into staying in a job they no longer want.
- You may fail to support a non-compete agreement with an adequate salary hike, employee incentives, or other benefits.
What Happens if a Non-Compete Clause is Violated?
You may seek a court order for injunctive relief if a non-compete clause is violated. You may also seek monetary damages to compensate for losses suffered as a result of the breach.
Here is a summary of some non-compete clause sample cases where employers have sought such options:
Final Thoughts: Is a Non-Compete Clause Right for Your Business?
Non-compete agreements have strategic usage to prevent misuse of your intellectual property.
Before implementing such clauses in the employment contracts, you should consider the following:
Pros:
- Prevents key information from reaching competitors.
- Deters employees from taking undue advantage of skill training and leaving immediately for better pay.
- Maintains client loyalty and continuity.
Cons:
- Limits career opportunities, which can affect morale.
- Non-competes may face enforceability issues, especially in certain states.
- Enforcing non-competes can be expensive and time-consuming.
How Skuad Can Help You Hire, Pay, and Manage Employees Globally
non-competes are subject to local labor laws and regulations. You need an expert solution provider to help you navigate the regional labor compliance and company formation laws.
Here is where Skuad can help.
Skuad offers comprehensive global HR solutions to simplify compliant hiring, payroll, and management of international employees.
With its Employer of Record (EOR) platform, Skuad ensures your company can seamlessly handle HR requirements in over 160 countries while adhering to local employment laws, including compliant non-compete clauses.
Take a demo today to learn more about its use cases.
FAQs
1) What does the non-compete clause mean?
The non-compete clause restricts the employee from working for competitors after termination or resignation. It may also prevent employees from disclosing trade secrets and other sensitive information during employment.
If you’re wondering “What is a non-compete clause in a contract” or “What is a non-compete agreement for employee“ - they both refer to the same concept.
A non-compete clause is usually included in either the employment agreement or contract to protect the employer’s business interests.
2) Are non-compete clauses enforceable?
Non-compete clauses in the United States are not fully enforceable and are state-specific. Even though the FTC has banned non-competency enforcement nationwide, the rule is still not enforceable in many states.
Currently, nine US states penalize employers for enforcing prohibited non-compete clauses. Get expert help from Skuad to manage employees and stay compliant with local laws.
The enforceability of non-compete clauses in the United States is state-specific and limited. This rule remains effective in many states, even though the FTC has prohibited the nationwide enforcement of non-competes.
Even now, nine US states fine employers for applying non-compete clauses that are not allowed by law. Let Skuad, with expert hands on deck, take care of employee management and compliance with local laws.
3) Do companies sue for non-compete?
Yes, companies can sue former employees or competitors for violating their noncompete agreement in the employment contract.
4) What voids a non-compete agreement?
Courts check for three criteria: Reasonable, Proportional, and in furtherance of a Legitimate Interest for declaring any non-compete agreement void. You can align your employment agreement with these factors to make your non-compete more enforceable.
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