Non-Compete Agreements: What Can They Accomplish?

It may seem ironic that companies encourage innovation and brilliance while employees are on the payroll, but pull the plug on that ambition if they dare to leave. But non-compete agreements do just that in a corporate attempt at damage control.

Whether signed when staff members come on board, or as part of a ream of paper presented as they leave, all non-compete agreements have similar restrictions. An employer lays claim to any products, intellectual property and ideas developed while on the job. And clients handled while a staff member was employed by the company are also generally off-limits.

Courts have tried to balance the interests of employers and departing employees in deciding whether or not a non-compete agreement should be upheld. In order to hold up, here are three areas in which the agreement must be reasonable:

Time. You obviously can’t restrict a former employee from competing forever. The time period considered reasonable is one to three years. Sometimes this period is shortened, depending on the industry. For instance, in high-tech businesses where information changes quickly, the restrictions are frequently shorter.

Geography. You can make restrictions in the area where your company does business, but probably not nationwide or worldwide. One exception is Internet or software companies that operate worldwide.

Scope. No non-compete agreement can strip an employee of the right to earn a living. An agreement can restrict certain core functions, but it can’t prevent an employee from using skills acquired over years. Agreements are analyzed for reasonableness by the courts.

Restrictions must normally be limited to the job the employee performed for the employer. For example, a software engineer for General Motors can’t be restricted from taking a sales job at Toyota.

Non-compete agreements are subject to the laws of the state in which they’re written. Some states don’t recognize them. Others stipulate that employees must enter into the agreements when first hired. If the document is sprung on an employee later, up to and including quitting day, the company may have to offer something extra (such as a promotion, raise, stock options or other enticement) for the agreement to be valid. So the best time to secure an agreement is when you hire an employee.

To sum up, you can prevent staff members from competing with you after they leave your company but the exact restrictions depend on many things, most importantly, whether circumstances make it reasonable and enforceable. Consult with your attorney for assistance in drafting the agreement.