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
The Business Tools area contains some sample
language that you might want to consider incorporating into a noncompete
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
- all employees who are engaged in or related to research or product
- all engineers and drafting employees engaged in design or engineering work
including, for example, tool room engineers, plant engineers, manufacturing
- 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
- all employees who may reasonably be expected to do creative work relative
to trade names, advertising, broadcasting, sales promotion material, and the
- 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.