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Non-compete Agreement

Non-compete agreements are legal contracts between employees and employers stating that company information can or (more often) cannot be used by current or former employees. The agreement also prevents the employee from competing, directly or indirectly, against the employer and its successors and/or from joining a competitor, during the period of employment and for a specified period of time after leaving the company, regardless of the cause or reason of termination.

Laws vary from state to state regarding non-compete agreements. In California, for example, it is illegal; employers cannot restrict the livelihood of their current or former employees. Many other states specify that they must be entered into at the beginning of the employee relationship. If they are mentioned later, there must be something new given by the employer—either a significant promotion, a large raise or other similar enticement, and it needs to be in writing.

Most applicants and employees, when signing a non-compete agreement, do not take it seriously and assume the relationship will run smoothly. It is in the best interest of the newly-hired employee to go through the agreement carefully, and assess all the pros and cons—especially in regard to not being able to work with or for the company’s clients or competitors for a specified period of years.

There are four types of non-compete agreements restricting the employees’ use of company information:

  • Non-compete agreement - Prohibits employee from working for a competitor of the employer, or from competing against the employer after his/her employment ends.
  • Non-solicitation agreement - Prevents former employee from soliciting, contracting, or transacting business with the employer’s existing clients or customers.
  • Non-disclosure agreement - Prevents employees from using their former employer’s trade secrets, proprietary information, and/or confidential business information, or disclosing this information to third parties, or disclosing trade secrets to competitors or for a competitor’s benefit.
  • Confidentiality agreement - Informs the employee that the employer intends to keep certain information confidential.

In determining whether a non-compete agreement is valid, courts assess the following questions:

  • Does the agreement protect a legitimate interest of the employer?
  • Is the agreement too restrictive in terms of its duration? Is the agreement limited to the amount of time necessary to reasonably protect the employer?
  • Is the agreement too restrictive in terms of the geographic boundaries specified? Is the agreement limited to the geographic areas necessary to reasonably protect the employer?
  • Is the agreement supported by good consideration?
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