What is a non-compete agreement?
A non-compete agreement as the name implies is a contract between employees and their employers in which they agree to refrain from working for competitors. The regulation remains in place for a specific amount of time once a worker resigns from a company.
The laws and rules for these regulations differ from state to state. This includes whether a non-compete is enforceable or not and to what extent. Typically, the law where the worker is stationed come into effect even if the organization they work for is located elsewhere.
What makes up a non-compete agreement?
This agreement is usually made up of 2 parts namely:
- Restrictions regarding where employees can work after they leave the company
- Copyright protection of trade or company secrets
The trade secret protection rule is basically a non-disclosure agreement which is necessary to ensure company secrets are kept from competitors who might otherwise exploit it. This can be anything from product information and clientele to sales techniques.
Work restrictions are rules that prevent ex-employees from working for competing companies which either share the same market or location. This rule is usually applicable for 2 years and is defined broadly enough to give any employee who leaves a difficult time finding similar employment.
Are these agreements enforceable?
Since non-compete agreements are often restrictive, they are usually not enforceable. For instance, in California, these are actually illegal unless a business is being sold off. Similarly, other states may sometimes waive work restrictions and allow non-disclosure agreements.
The clauses in such agreements are meant to discourage employees from quitting or leaving and working for competitors or open a similar business of their own. However, since employers cannot prevent them from supporting themselves and their families most employees can get away with these without repercussions from the state. In most cases the restrictions are minimized to the extent that a non-solicitation clause is used in its place.
What do the courts look at?
In exception circumstances, some courts may entertain violations of this agreement by considering the following factors:
The amount of confidential information that the employee has access to when he/she was working with the company. This includes private information about clients.
- How vulnerable the ex-employer is to competitors.
- The relationship of the employee with key clients or how much they worked with them or whether they worked with them exclusively.
- How long the employee was employed.
- What the business is involved in and what it does with respect to customer loyalty.
- The damage a competing employee can do if he/she tries to work in the same market.
- How much influence the employee has on clients and whether they relied on his/her trust/advice.
Taking these issues into account, the court will come to a decision that can protect the employer without enforcing restrictions on the departing employee. The agreement has to be within the realm of reason in regards to duration and scope.
For instance, if the agreement protects company information, it may only be enforceable till said information has any value. Similarly, the geographical area that is mentioned in the agreement should depend on circumstances.
The decision will depend on how loyal the employee was, the services he/she provided and their importance to the business. In most cases, courts make a non-competing agreement unenforceable in areas where the employer does not do business. This may also be the case if the court thinks that the clauses mentioned in it are too extreme. In such cases, it will narrow down duration or in extreme cases, refuse to enforce it. The latter is possible if the court finds that the employer did it to prevent legitimate competition.
However, the extent to which the law can intervene in such matters differs from state to state. Before going to court, make sure you are aware of your rights according to your location.
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