Companies expend a considerable amount to provide pay for employees to develop their skills in a certain field. However, instances always arise when an employee who has become an expert chooses to resign from the company and seek a greener pasture. If the former employee ever chooses to work under a new employer that rivals the company, then it will become unfair for the company in a competitive sense, as it is under their expense that the employee got its skill. To prevent this from happening, employers make their employees sign a non-compete agreement.
A non-compete agreement samples is a legal contract that is enforced to prevent an employee from going into a business venture that will compete with their former employer. It is usually enforced by an employer when an employee is about to resign. For this article, we will get you covered in all the aspects involved in creating an effective non-compete agreement.
Elements of a Good Employee Non-Compete Agreement
1. Competition: In a non-compete agreement, the employer must be able to clearly define what employee activities are considered competitive. The most common one being considered is the transfer to another company with a rival branding or product of the company.
2. Geographical Scope: This refers to the area where the restriction of the competitive activity is imposed. It would be an overboard for a non-compete agreement to ban an employee from competing in places where it is no longer within the employer’s geographical scope of interest, so the agreement must be able to specify these locations where competing is prohibited.
3. Duration: Non-compete agreements are not imposed indefinitely as businesses are always developing, and keeping a former employee, who knows about a trade secret or has a skill developed during his time at the company, from competing might not be relevant anymore. Your non-compete agreement must have a specific time period or duration on how long it will remain effective.
4. Injunctive Relief: The company needs to ensure that it can take legal actions once an employee is found to be breaching the agreement. With a provision that entitles the company to an injunctive relief, they will be able to impose penalties to compensate for losses incurred with each passing day that an employee benefits from competing.
5. Severance: A company might make an employee sign a non-compete agreement and terminates that employee thereafter. The non-compete agreement will still be in effect so the now ex-employee gets a very limited pool of prospective companies to work for. To prevent this corporate bullying and to ensure that the employee is treated fairly, a non-compete agreement must always include a severance provision that requires the company to provide compensation upon employee termination.
6. Consideration: This is not a provision but an important characteristic of your non-compete agreement. Countless companies have been struck down or have experienced prospective key employees walking away from them just because their non-compete agreement is too one-sided, meaning only the company gets all the benefit. A good non-compete agreement protects the company’s interests, sure, but it must also always consider if the employee is not being put in an unfair situation because of it.
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Steps to Make an Employee Non-Compete Agreement
1. Notes before writing your non-compete: It has been said before that a non-compete agreement can be turned down by the court if the contract is found out to be inconsiderate to the employee. So, throughout the process of writing your non-compete agreement, always keep in mind if it will considerably harm the welfare of your employee. Doing so will make non-compete agreement valid and enforceable.
2. Define competitive activities: You don’t want to prohibit former employees from engaging in too many types of businesses. Stick to activities that would only significantly harm your business. Some standard prohibited activities include soliciting the company’s clients, attempting to hire the company’s employees or encouraging other employees to leave, or competing with your business directly by starting a similar business.
3. Specify the geographical scope: The reasonableness of your geographic scope depends on a variety of factors, like the location of the existing competition and the type of industry practice. If you think that this area will not affect you in any way, then you should not include it.
4. Determining the duration: The typical amount of time that a non-compete runs is between one to two years. Take into account the period of the relevance of the knowledge that the former employee knows or the skills they have learned from company training, and determine how long it will stay relevant.
5. Including the injunctive relief: You would always want to include an injunctive relief to protect your company from financial strain upon the former employee’s non-conformance of the agreement. However, this provision seems to receive the highest rate of becoming unenforceable as most courts often find this too self-serving to the side of the company. Take caution in coming up with this provision that it would not sound too one-sided and explain your side on why it is necessary.
6. Coming up with the terms of severance: Lastly, indicate the compensation that you will be conferring to the employee if ever they will be terminated. The amount must be reasonable enough that it will keep the employee financially afloat while searching for a job that will not breach your non-compete agreement.
Tips for a Great Employee Non-Compete Agreement
- Conduct an exit interview with your employee: When an employee under a non-compete agreement chooses to leave your company, conduct an exit interview with the departing employee as some sort of reminder about the still-running agreement. You can provide a copy of the agreement and let them sign an acknowledgment form that certifies your mutual understanding of its terms and conditions.
- Include a waiving option: A non-compete agreement must also include the option of waiving its application. A non-compete agreement, although always imposed by a company, is not mandatory for the employee to sign on. If ever the employee chooses to waive in signing the agreement, the employee must give up severance packages tied to the agreement. You should also include a short section that discusses this waiver in the addendum of this business contract.
Types of Employee Non-Compete Agreement
- Regular Non-compete Agreement: This is the agreement that prohibits an ex-employee in working for their former company’s competitor or in coming up with a startup company that can potentially be a competitor.
- Non-Solicitation of Customers Agreement: This agreement inhibits a former employee to work or sell to any clients or customers of the company. This type of agreement commonly prevents a freelancer, who was once a regular employee at the company, to poach customers and clients.
- Non-Solicitation of Employees Agreement: While the previous type prevents a former employee to steal customers, this type of non-compete agreement prevents an ex-employee from hiring their former co-workers in their new business or new company. This will prevent the scenario of the company being brain-drained of its work force. Employee non-solicitation agreement is also known as anti-raiding or “no hire” agreement.
- Confidentiality or non-disclosure: This type of agreement prevents an ex-employee from divulging the company’s important trade secrets to their new employer that may affect the company’s competitive situation.
Employee Non-Compete Agreement Template Sizes
Employee non-compete agreement and contract templates are available at the standard sizes of US legal (8.5 inches by 14 inches), US letter (8.5 inches by 11 inches), and A4 (8.27 inches by 11.69 inches).
Employee Non-Compete Agreement FAQs
Does an employee need to sign a non-compete agreement?
It is prohibited by law that an employee is forced to sign any business contract, and that includes a non-compete agreement. However, an employer can require a prospect to sign a non-compete agreement before starting the work. Opting not to sign the contract offer may cost a job applicant the opportunity to work for the company, but the option of signing still remains in that person.
Non-compete agreements sound so restrictive to me. How is it legal?
Non-compete agreements are allowed and enforceable as long as it meets the four requirements. First, the provisions must only exist to protect the employer’s legitimate interests. Second, it does impose unfair terms on the employee. Third, it does not constitute harm to the masses. And fourth, it has a reasonable duration and geographical scope.
Reasonableness and consideration are the two pillars of your non-compete agreement. Although it is your business interest that you are protecting, not sparing any dime for your employee’s welfare could cost you a strike down from the gavel, that is, someone may lodge you with an expensive legal complaint and that would not be beneficial to anyone. Learn to meet halfway and you should be alright and airtight in enforcing your non-compete agreement.