If you’re reading up about hiring employees for your business, you’ve probably come across the term, non-compete. Though many small and mid-size businesses don’t consider it essential, it could be crucial, especially if the venture’s nature calls for it.
What is a non-compete, and when should or shouldn’t you sign it? And more importantly, how does it protect the business? Pull up a chair and get ready to learn all about this agreement.
What is a non-compete?
First things first – what is a non-compete? A non-compete is an agreement between the employer and the employee that the latter wouldn’t launch a business that would compete with the former’s venture. The clause can also prohibit the employee from joining a competing company immediately after leaving the employer.
The agreement could take effect during the employment period and a specific period after one’s employment. It also goes by other names: non-compete covenant, non-compete clause, and covenant not to compete.
You can look up a non-competition clause sample online to see how companies usually draft the agreement. However, contracts would include the following essential parts:
- Effectivity Period. As mentioned above, the agreement usually covers the employment period as well as a period of time after the employment. It is crucial to note, however, that the agreement should indicate a realistic period. As a result, you can’t permanently bar former employees from seeking career growth in the industry.
- Scope. The agreement identifies the scope of the clause. For instance, it may indicate a number of mile-radius from the company premises.
- Compensation for Non-Compete Agreement. Besides the time period and scope, the clause also indicates the amount of damage compensation one has to pay if they violate the agreement.
When to sign it
Now that you know what is a non-compete let’s go over the topic of when to sign it. Technically, the need to have a non-compete can vary from case to case as each business is unique on its own.
Below are some of the pros a non-compete covenant can provide your business. You should strongly consider having a non-compete in place if these benefits are especially important to your venture.
- If your company has trade secrets crucial to your success within your industry, then a non-compete clause can be useful. It allows you to trust your employees without having to worry that they might use info about your business operations for their persona benefit.
- A non-compete clause may also reduce employee turnover in your business. When employees don’t have a problem signing the clause, it means they intend to stay in the long term. The clause also helps assure you that they’re not simply getting a job to spy or use company info for personal interests.
- In relation to the second benefit, having a non-compete clause will give you the confidence to provide costly training to your staff. Because there’s no fear that they’re just taking advantage of the training, you can help them grow the best way they can.
Non-Compete vs. Non-Disclosure
Though both non-compete and non-disclosure agreements both aim to protect the business, these two are different from each other. Non-disclosure agreements or NDAs don’t prevent a person from joining a competing business. However, it binds the employee not to reveal any info crucial to the former employer’s business. This info may include client lists, products under development, as well as other technology or special operations crucial to the business.
When not to sign a non-compete
It pays to read up on non-compete agreements by state. For instance, states like North Carolina and Oklahoma don’t honor the clause. In California, binding an employee to a non-compete clause after their employment can be grounds for a lawsuit.
Some states allow non-compete clauses but only for certain industries or for a specific amount of time. For instance, Utah limits such agreements to cover only one year. Hawaii, on the other hand, banned the agreement for high-tech businesses starting in 2015.
Despite the benefits of a non-compete, there are instances when entering one might not be an ideal move. For example, if you mostly hire fresh graduates with limited experience, having them sign such a clause could significantly hinder their career growth. In the same vein, the clause might force top talents to change careers altogether. This could be considered a loss for the industry in general.
How are you protected?
What is a non-compete if not to protect the company in the first place, right? For one, it would prevent the risk of a former employee taking advantage of the years you’ve spent learning the curves of your industry.
Let’s say you own a restaurant known for its special steak sauce. It took you decades to perfect the recipe for that signature sauce, and you built an entire menu, brand, and business around it. If you’re a mega-corporation with the resources to guard your recipe amid production, then you have no problem. But if you’re operating a small to mid-size business, it would be tricky to keep the restaurant running while still making the recipe a secret.
In short, it would be unfortunate if someone deliberately joins the business only to learn the recipe and your business process so that they can open their own venture to compete with you.
Legal Factors to Consider
One thing to remember about non-competes is that it’s meant to protect both the employer and the employee. If the agreement only serves the business and not the worker, then it may not be considered fair and legal. A poorly-designed clause may even result in lawsuits – it may do more harm than good to the company if not properly drafted.
If it’s your first time drafting a non-compete, it’s best to have it reviewed by a legal counsel. This step can help prevent former employees from taking advantage of your business. At the same time, it could also ensure that you’re not stepping out of bounds and overly restricting your employee’s career and personal growth.