By Winmark Business Solutions
A noncompete agreement is either a separate agreement or a clause in an employment contract that prohibits an employee from working in a related business in your area for a certain length of time. Noncompete agreements are used to prevent an employee from using your business’s confidential information.
You can make the signing of a noncompete agreement part of your terms of employment without creating an employment contract. It’s important not to make it seem that by signing the noncompete agreement, an employee can expect to be employed forever. A noncompete agreement applies only to one specific aspect of an employment relationship — the confidential information related to your business.
The challenge lies in deciding if noncompete agreements are right for your business and which employees should sign them.
The bad news. While some consider noncompete agreements an effective way to protect the business’s time, money and resources, such agreements are difficult to enforce and are not looked favorably upon by many states’ courts because they restrict an individual’s choice of employment. Check out our tips for making noncompete agreements enforceable.
Who should sign noncompete agreements? Not all your employees may need to sign noncompete agreements. The janitor, for example, may not have access to any sensitive information, so you shouldn’t ask that employee to sign one.
Employees who should be asked to sign noncompete/nondisclosure agreements are:
- all employees who are engaged in or related to research or product development work
- all engineers and drafting employees engaged in design or engineering work including, for example, tool room engineers, plant engineers, manufacturing trainees, etc.
- all employees engaged in the service of machines, apparatus, appliances and similar products made or sold by your business
- manufacturing, maintenance and production department heads, if applicable, who have substantial supervisory authority over the manufacture or production of products, apparatus, machines and the like made by your business
- all employees who may reasonably be expected to do creative work relative to trade names, advertising, broadcasting, sales promotion material and the like
- all sales/service employees who are likely to encounter customer problems, suggest solutions, etc.
- all clerical and office employees whose position and responsibilities require complete direct accounting for or processing of details relating to any experimental, inventive or creative work
- all employees who have sufficient information about your business to be able to start up a similar business that would compete with you
Enforcing noncompete agreements. Noncompete agreements are hard to enforce. Many courts perceive them as attempts to limit an individual’s ability to obtain employment. For that reason, most courts will insist that a noncompete agreement be reasonably limited in geographic scope and duration. To ensure that your noncompete clause or agreement is enforceable:
- Have your agreement drafted by your attorney. If you ever have to enforce this document, it will be closely scrutinized by the courts.
- Make sure that it follows applicable state law.
- Be sure there is sufficient consideration (i.e., compensation) given to the employee for signing the agreement.
- If the agreement is part of the hiring process, giving the employee the job is sufficient consideration for agreeing to refrain from competing later on.
- If the agreement is signed later on, the promise of a raise or a promotion is probably sufficient. Even the promise of continued employment may be enough consideration if you are prepared to show that you would have fired the employee for failing to sign the agreement.
- Have it drawn as narrowly as possible. Generally, only those restrictions that are reasonably necessary to protect a company’s legitimate or “protectable” interests will be upheld.
- Define the company’s legitimate or protectable interest. Be specific in terms of equipment, information, technology, strategy, sales prospects and other pertinent proprietary information. Even though you specify it, it will be up to the courts to determine if it is confidential.
- Reasonably relate the restrictions to what the company seeks to protect. If the time and geographic restrictions, for example, are too long or too broad, the agreement will not be enforceable.
- Structure the agreement with an eye toward partial enforcement. Even if a court finds the restrictions too broad, you can include a clause saying that if one part of the agreement is held invalid, the remainder of it should still be enforced. This may give you some protection, even though it is not everything you required in the agreement.
- Do not selectively utilize or enforce such agreements. Make all similarly situated employees sign them, and make sure all employees comply with the agreements they sign.
About the Author
Winmark Business Solutions (WBS) is a free Web site for small businesses and entrepreneurs containing over 6,000 pages of business-critical information and downloadable tools at www.WBSonline.com. WBS is a division of Winmark Corporation, a multi-brand franchisor with nearly 900 franchise locations in North America. With over 25 years working with small businesses, WBS draws upon years of experience to bring important small business articles, information, tools, forms, checklists, calculators and downloadable forms to the small business owner to help their business grow. WBS contains over 6000 pages of business-critical information all available at www.WBSonline.com.