A non-compete agreement is a contract between two parties, usually two individuals or one company and one individual, in which one of the individuals promises not to compete with the other individual or company once their relationship with the company has ended. That is, they will not start, join, or buy a business that is similar to, and in competition with, the other.
The agreement is typically signed at the start of a business relationship, such as between a company and:
- A new employee
- An independent contractor
- A consultant hired to address a particular internal issue
- A vendor that will be privy to confidential information
But it can also be signed as a relationship is ending, too, such as when:
- A key employee is being let go or chooses to leave
- A partner decides to exit the business, or is forced out
The goal of the agreement is to make it clear that if an employee leaves the company, or an external consultant finishes his or her engagement, they are prohibited from creating a new business to compete with the company that just paid them for their services.
While the overarching goal of such an agreement is to discourage or prevent a new competitor from forming, there are specific aspects to the agreement that need to be spelled out, including, but not limited to:
- Who is agreeing not to compete
- Who is preventing the competition
- As of when is the agreement effective
- How long is the agreement enforceable
- What type of business is prohibited
- The reason for the prohibition
- The geographic area within which competition is prohibited
- What the payment is – called “consideration’ – in return for this agreement
There may also be other clauses included, especially when employees are concerned, that spell out:
- Non-solicitation – meaning clients of the firm may not be contacted and persuaded to leave
- Non-recruitment – nor can employees be approached about jumping ship for the new company
Are they enforceable?
There has been much discussion about whether non-compete agreements will hold up in a court of law. In some states, such as California, non-compete agreements are unenforceable against employees. So, as a business owner, you can ask an employee to sign one, but it won’t mean much there.
In other states, non-competes may be enforced, and it often comes down to how reasonable the contract was. In particular, how restrictive is the scope, geography, and time. The more broad the agreement, such as asking for a global non-compete in any kind of management consulting lasting ten years, the less likely the courts will uphold it, or enforce it.
It’s always wise for anyone creating or signing a non-compete agreement to first consult an attorney for advice about it.