In order to avoid damaging losses, more and more employers are asking (or requiring) their employees to sign non-compete agreements. But according to Don Kochersberger of Streubel Kochersberger Mortimer in Albuquerque, New Mexico, a non-compete agreement can only do its job for your company if it can be enforced. Far too many non-compete agreements, he says, are simply too restrictive.
What Is a Non-Compete Agreement?
The purpose of a non-compete agreement, says Kochersberger, is to prevent losing employees, customers and trade secrets to your competitors. When an employee signs a non-compete agreement, he is agreeing not to work for any of your direct competitors for a specified period of time after he leaves your company. A non-compete agreement may also prevent an employee from taking your customers with him if he leaves your company.
Non-compete agreements are often combined with confidentiality (or non-disclosure) agreements. Confidentiality agreements, says Kochersberger, prevent your employees from sharing your valuable trade secrets with any of your competitors or using them to form their own companies.
Making It Stick
While non-compete agreements offer obvious benefits for the employer, many employees balk. “All employers want to have non-compete agreements in place with their employees,” says Kochersberger, “but no employees ever want to sign them.” The reason for many employees’ reluctance is simple - they need to earn a living. Agreeing not to work for a competitor, especially in a niche industry, may make it extremely difficult for an employee to find a job if he leaves his company, willingly or otherwise.
The most important aspect of your non-compete agreement, says Kochersberger, is whether or not it’s really enforceable. In general, the less restrictive your non-compete agreement it, the more enforceable it is, and therefore the more likely it is to prevent your company from expensive losses. In order to create an effective, enforceable non-compete agreement, there are several things to consider.
First, says Kochersberger, consider your reasons for asking employees to sign a non-compete agreement in the first place. This is something you should be able to articulate, he says, in the event that you become involved in litigation. Are you asking all of your employees to sign non-competes, or just those employees who truly have access to inside information? The court is more likely to enforce non-compete agreements against those employees who are in a position to do real damage to your company if they were to work for a competitor.
Also consider whether the contract offers any direct benefit to the employee. A non-disclosure agreement is usually more enforceable if you give the employee something in return for signing it. Making a job offer or promotion contingent on signing a non-compete agreement may be acceptable.
Your non-compete agreement must also be reasonable in terms of scope, geography and time. That is, it can’t last too long, cover too wide a geographic area, or be so broad in scope that it prevents employees from working in many different fields. For example, says Kochersberger, if the non-compete agreement is so restrictive as to prevent any given employee from getting a job without moving across the country or going completely outside his area of expertise, it’s likely not going to be enforceable and it’s not going to do its job of protecting your company.
There are exceptions to this rule, however. In instances where one person is selling a business to another, the buyer often requires the seller to enter into a non-compete agreement to prevent the seller from using his knowledge of trade secrets to form another competing company. In these cases, non-compete agreements can be much more restrictive than employer/employee non-compete agreements. The reason is that, in theory at least, the seller should have been compensated for his “insider’s perspective” as part of the sale of his business.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
