As a business owner, you appreciate the products and services you provide to the market, especially if they are unique to your company. The last thing you want is for an employee to depart and start their own business. As a result, many businesses add a non-compete agreement or clause in employee contracts.
A non-compete clause prohibits your employee from performing a certain action for a set period of time after their employment contract has expired. This article will describe the operation of a non-compete clause. It will explain what it is, why it exists, and any laws that apply to it.
What is a Non-compete Clause?
A non-compete agreement, often known as a clause, is a legal instrument that bans employees from competing with your company once their employment ends. A non-compete agreement can offer many forms of protection.
- Employees using trade secrets: A noncompete agreement can prevent former employees from sharing ideas, software, formulas, processes, client lists, or intellectual property received on the job with another employer, or from utilising this information to start their own firm.
- Geographic and time constraints: A noncompete agreement often prohibits employees from working for a rival of an organisation for a specified length of time and/or in a specific geographic area after leaving the company.
- Poaching customers: A noncompete agreement can also be used to prohibit employees from poaching customers from a company if they launch their own business after leaving their previous employer.
A noncompete clause’s duration can vary widely, often ranging from six months to five years but sometimes lasting even longer. The idea is to prevent firms from spending time and money training and shaping employees just to have them transfer those abilities to a direct competitor.
Understanding Non-Compete Clause
Non-compete agreements are written when the employer-employee relationship begins. They allow the employer influence over certain employee acts even after the relationship has ended.
These agreements have specific stipulations saying that the employee would not work for a competitor when their job is terminated or resigned. Employees are often barred from working for a competitor, even if the new employment would not require them to reveal trade secrets.
Some contract provisions may include the length of time the employee is obligated by the non-compete agreement, the geographic region the employee may work in after employment, or the market in which the employee may work. These agreements are sometimes referred to as a “covenant not to compete” or a “restrictive covenant.”
Non-competition clauses ensure that an employee will not use information gained while employment to start a business and compete with the employer after the employment ends. It also ensures that the employer maintains its market position.
Components of a Non-Compete Clause
Non-compete agreements are not often standardised, but many contain similar restrictive provisions. A non-compete agreement may include the following provisions:
- Duration: Long-term noncompete agreements are rarely upheld in court. Typical agreements are for two years or less, with six months to a year being the most prevalent. They may also include a severance option in the event that the employee is terminated.
- Scope: The scope of this clause must be specific in terms of the restricted work and specific services.
- Geography: The location of the company’s operations is a valid assumption. Noncompete agreements may include a mile radius surrounding the office address.
Non-compete agreements can also include information about direct competition and damages.
- Competition: The employer must identify its competitors. It is not required to specify each one explicitly, but it must define the types of firms and industries in which employees are not permitted to work.
- Damages: This clause specifies the penalties that the employer is entitled to if an employee violates the agreement.
These are the essential elements of valid noncompete agreements:
- Follow your state’s noncompete rules (each state is different).
- Make it feasible for the employed person to find alternative work or to start a business.
- Check if the agreement is proportionate to what is being safeguarded and what the employee is foregoing.
When and Why Are Non-Compete Clauses Used?
Noncompete agreements are typically used in the following situations:
#1. Client-centric industries
Noncompete agreements are widely used in areas where employees are required to create their personal brand or client list while working. Sales and service specialists are frequently included. If you own a salon, for example, each service provider is likely to have a loyal clientele. They may have acquired this customer through recommendations and marketing services offered by your company. If that supplier left to open their own salon in the same town, they would most likely take their customers with them and become your direct competition, employing business skills developed at your company.
#2. When businesses are sold
Noncompete agreements should also be used when selling a business. The buyer may compel the seller to sign a non-compete clause in which they commit not to open a rival business. You wouldn’t want to acquire a restaurant if the owner intended to open another one across town right away and steal their clientele.
#3. When dealing with highly private information
Noncompete agreements may be required if the employee will have access to highly private proprietary information while on the job. This information could be a unique recipe for a product or a complex algorithm built just for your IT firm. Consider having new personnel sign a non-compete clause if they could utilise information obtained from your company to reproduce your product or service for a competitor in a way that would be detrimental to your company.
The Benefits and Drawbacks of a Non-Compete Clause
Let’s take a look at some of the benefits and drawbacks of this non-compete clause:
Pros
- Keep trade secrets and proprietary information safe.
- Employees who sign them may be inspired to come up with new ideas.
- Employers are matched with employees looking for long-term positions.
- Lower employee turnover
Cons
- Reduce employees’ negotiating power
- Waiting a long time before applying for another job in the same field
- There are few social benefits.
- Employees without trade secrets may be restricted.
Pros Explained
#1. Protect trade secrets
These agreements can shield firms from employees who defect to a competitor and share sensitive information. Having said that, the agreements must be fair to both the employee signing the agreement and the employer issuing it.
#2. Inspire more innovations
Non-compete agreements can prevent ideas and information from spreading, pushing competitors to innovate in order to compete with other businesses.
#3. Used for employee matchmaking
Employers may utilise a non-compete agreement to match them with individuals who intend to stay at their current employment or who can be trusted with sensitive information.
#4. Reduce employee turnover or exit
Non-compete agreements can reduce employee turnover since they limit other employment options. Furthermore, organisations with incompetent staff may need to provide training and instruction to their employees in order for them to continue inventing, thus improving their careers and market worth.
Cons Explained
#1. Weaken employee bargaining power
When under non-compete, employees are forbidden from finding a better-paying position or bargaining for increased compensation or benefits.
#2. The time it takes to find a new employment can be lengthy
Non-compete wait periods may prevent departing employees from finding meaningful employment in their fields of competence. Employees who sign non-compete agreements may leave their field entirely if finding a new job becomes too difficult after signing one.
#3. Few social benefits
Non-compete agreements often benefit only the firm and do not provide many social benefits to employees.
#4. Can restrict employees who do not have trade secrets
According to the Office of Economic Policy at the UK Department of the Treasury, less than half of workers under non-compete agreements have trade secrets. Unfortunately, this means that more than half of workers subject to non-compete agreements are unnecessarily confined by these restrictions, further limiting their bargaining power.
Non-Compete vs. Non-Disclosure Clauses
Non-compete agreements differ from non-disclosure agreements (NDAs), which normally do not prohibit employees from working for a competitor.
NDAs, on the other hand, forbid employees from disclosing information that the employer regards as private or confidential, such as customer lists, underlying technology, or information about items in development.
How Long Do Most Non-Competes Last?
Non-compete periods are typically six months to one year long, but they can be extended. Long-term non-compete agreements, on the other hand, are difficult for corporations to legally enforce. Some jurisdictions refuse to enforce these agreements, and others refuse to recognise them as valid.
How Do I Get Around a Non-Compete Agreement?
In theory, you may be sued if you signed a non-compete agreement and violated it. Non-compete agreements are enforced (or not) by state law, which varies.
Are Non-Competes Really Enforceable?
The legality and enforcement of non-compete agreements varies by state. Beck Reed Riden LLP conducted a survey of states and created a summary of their positions on non-compete agreements, protected interests, criteria, and exemptions.
What Were the UK Government’s Consultations on Non-compete Clauses About?
The UK government consulted the public in 2021 on potential changes to the law governing non-compete agreements. They solicited feedback on the feasibility of instituting laws governing non-compete provisions, including the requirement that they be accompanied by pay. The United Kingdom government is now analysing the outcomes of their consultation.
What is the Current Position on Non-Compete Clauses?
While non-compete clauses can still be used in employment contracts, the government is mulling modifications to the legislation. These adjustments would be in response to the economic impact of the COVID-19 pandemic. The government acknowledges that non-compete agreements can make it difficult for workers to find work or start their own businesses. Indeed, it may compete with their former job, inhibiting innovation and competitiveness.
As a result, the UK government held a consultation on this area of employment law between 4 December 2020 and 26 February 2021 to gather public feedback.
How Enforceable is a Non-compete?
Non-compete agreements that are less than three months in length and are fairly essential to protect the employer’s interests are more likely to be enforced, but there is no hard and fast rule, and each clause must be evaluated on its own merits.
Can Companies Enforce a Non-compete Clause?
No matter what your contract says, your former company cannot prevent you from taking a new position unless it will cost them money. When you depart, you might take consumers to your new employer. Start a competitor business in the same neighbourhood.
How Do You Beat a Non-compete Clause UK?
If your former employer wishes to contest your activities, they must sue you for breach of contract. It would be their responsibility to demonstrate to a court that the clause was legitimate. You could win such a case by demonstrating that the agreement was irrational or exclusively intended to restrict free commerce.
Can a Non compete Stop me From Working for a Competitor?
The short answer is “No,” you cannot prohibit an employee from working for a competitor for a period of 12 months. The typical approach is to include a restrictive covenant in the contract. That is, you include a noncompete clause, stating unequivocally that they are forbidden to compete with you once they leave.
How Long is a Non-compete UK?
The government will only apply the statutory restriction of three months to non-compete clauses in employment contracts and limb(b) worker contracts.
The Bottom Line
Signing a non-compete agreement may not always be in your best interests, but it is usually in your potential employer’s best interests. Before signing one, consult with an employment attorney for clarification on your state’s rules and consider the likelihood that you will have problems obtaining work in your field if you leave your position.
Not all states enforce non-compete agreements, but some do, so it’s worth knowing how a non-compete agreement will play out if you quit your work or violate your agreement ahead of time.
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