What is a non-compete agreement?
A non-compete agreement is a contract in which an employee promises not to compete in any way with an employer after the end of the employment period. These agreements also prohibit the employee from revealing proprietary information or secrets to any other party during or after employment.
Most contracts specify a certain period of time during which the employee cannot work with a competitor after having terminated his employment with the employer.
Employers can require employees to sign non-compete agreements to maintain their place in the market. Those required to sign these agreements may include employees, contractors, and consultants.
Understanding non-compete agreements
Non-compete agreements are signed when the relationship between the employer and the employee begins. They give the employer control over certain actions of the former employee, even after the relationship ends.
These agreements contain specific clauses stipulating that the employee will no longer work for a competitor after the end of his employment, whether he is dismissed or resigned. Employees are also prevented from working for a competitor even if the new job does not involve the disclosure of trade secrets.
Some of the terms of the contract may include the length of time the employee is bound to the non-compete agreement, geographic location and / or the market. These agreements can also be called a “non-compete undertaking” or a “restrictive undertaking”.
Non-competitors should be designed to keep the best interests of the employer and the employee in mind.
Non-competitors ensure that the employee will not use information learned during employment to start a business and compete with the employer after employment is completed. It also guarantees that the employer retains its place in the market.
Industries using non-competitive agreements
Non-compete agreements are common in the media. A television station may legitimately fear that a popular meteorologist will siphon viewers if it starts working for a rival station in the same region. In most jurisdictions, this would be considered a reasonable reason to sign a non-compete agreement.
Non-competitors are also common in the information technology (IT) sector, where employees are often responsible for proprietary information that can be considered valuable to a business. Other locations where these agreements are found include the financial sector, the business community and manufacturing.
Key points to remember
- A non-compete agreement is a contract in which an employee promises not to compete with the employer in any way after the end of the employment period.
- Under the agreement, the employee must not disclose any trade secrets learned while on the job.
- These contracts specify the period during which the employee must refrain from working with a competitor, the geographic location and / or the market.
Legalities of non-compete agreements
In the United States, the legal status of non-compete agreements falls under the jurisdiction of the states. States vary widely in their application and recognition of non-competition agreements, and many state legislatures have engaged in recent debates and updated legislation relating to non-competition agreements.
Non-compete agreements cannot be enforced in North Dakota and Oklahoma. California does not recognize non-competition agreements at all, and an employer who links an employee to an employee after his employment is terminated can be prosecuted. Hawaii banned non-compete for tech companies in 2020. In 2020, Utah changed the law, limiting new non-compete agreements to one year only.
Most states adopt some sort of standard that a non-compete agreement should not be egregious in terms of duration or geographic scope, and should not significantly restrict a worker’s ability to find employment. However, jurisdictions differ widely in the interpretation of terms of a non-compete agreement that would be too onerous.
Non-competition and non-disclosure agreements
Non-compete agreements are separate from non-disclosure agreements (NDAs), which generally do not prevent an employee from working for a competitor. Instead, the NDAs prevent the employee from revealing information that the employer considers to be proprietary or confidential, such as customer lists, underlying technology, or information about products in development.