What You Need To Know About Non-Compete Clauses

As a small business owner, you need every advantage you can get to remain profitable and compete with larger organizations. A non-compete clause can help you achieve these goals. However, you must avoid ambiguous language when drafting it to ensure that it provides the protection that you need. You also need to ensure that you have the legal right to require certain employees to sign a non-compete agreement. If you ask all employees to sign them without having a valid reason, a judge may rule against you if the case ever comes to court. You should work with an employment attorney if you have never drafted a non-compete agreement in the past. He or she can provide you with sample documents and help you choose the right wording for your own non-compete agreement.

Why You Need a Non-Compete Agreement

When you hire an employee, he or she has access to information about customers, trade secrets and other highly confidential data. If an employee resigns from your company to work for the direct competition, you don't want to risk the chance of him or her providing this insider information to the new employer. The employee may also choose to use the information obtained from your company to open his or her own business. A strong non-compete clause is need to ensure that your employees don't use confidential company data for their own personal gain.

A non-compete agreement is only valid for a specified period of time. During the time that it is enforceable, you may have the right to prohibit your employees from accepting job offers from the direct competition. The primary purpose of a non-compete agreement is to prevent your employees from releasing information they would not have had unless they were employed by your company. However, it can't be so restrictive that the employee can never leave your organization.

Defining a Trade Secret

Sometimes employees leak confidential information without actually intending to. This is usually due to not understanding what constitutes a trade secret. According to the International Trade Administration (ITA), which is a branch of the federal government, a trade secret can include a:

  • Formula
  • Pattern
  • Method
  • Device
  • Program
  • Technique
  • Process

When one of the above trade secrets is used, it must provide value to the company because it provides an advantage that the competition is not aware of. One of your employees can easily leak a trade secret by discussing specific ways he or she accomplished business goals at your company while meeting with a potential new employer. By engaging in this discussion, your employee is unknowingly providing the competition with privileged information. Whether intentional or not, you can hold the employee liable for providing the information as long as you have his or her signature on a non-compete agreement.

Considerations When Creating a Non-Compete Agreement

Before you finalize the wording of a non-compete agreement, you need to ensure that it is reasonable. Try to read it from your employee's point of view to see if you think it sounds fair. If a conflict does arise, a judge has the final say on whether the original document is reasonable or not. Keep in mind that he or she may discard any part of the contract that goes overboard on restricting an employee's right to earn a living apart from your organization.

Geographical Limitations

Non-compete clauses are illegal in California, except when the business owner is selling the company or his or her share of the ownership. For all other states, it is important to understand that non-compete agreements are only bound by state law. This means that the enforcement and validity of the contract vary from one state to the next. You also have the option of using a non-disclosure agreement. This document restricts third-party access while acknowledging that shared materials and knowledge must remain confidential. If you are uncertain of the laws in your state, speak to a small business expert before you meet with a lawyer.

Most non-compete agreements limit the geographic area where the employee can work for a competitor or open a new business. This is usually a specified number of miles or may include the whole state. It is not realistic to expect that an employee will never leave your company or that you have the right to prohibit him or her from working for any competitor.

In New Jersey, the limit on non-compete contracts is two years. It is your responsibility to find out the time limit imposed by the state where you do business before drafting a non-compete agreement. It is likely to be thrown out in court if you attempt to make the contract enforceable for longer than state law allows. This is true even if the employee did knowingly sign it.

Try to Strike a Fair Balance

In order to draft an effective non-compete agreement, you must equally consider each party's needs. You want to protect your business interests by not letting your trade secrets get into the hands of a competitor. Your employees need to earn a living, even if it is with another organization. You should be prepared to compromise on some points to increase your chances of the contract being declared valid. Keep in mind that a court won't force someone into unemployment in order to uphold your non-compete agreement.

Who Should Sign a Non-Compete Agreement?

It isn't necessary to have every employee sign a non-compete agreement if they don't have access to confidential data. You don't want to come across as an employer who is overly restrictive. When you hire a new employee, consider how often his or her daily duties require access to trade secrets or personal information about customers. If it is a majority of the time, that person is a good candidate to sign a non-compete agreement. This should be included with his or her new-hire paperwork.