Noncompete Agreements: Laws and Enforceability
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A noncompete agreement, also known as a noncompetition clause or a covenant to not compete, is a contractual agreement between an employee and an employer. The basic goal of a noncompete agreement is to make sure that an employee who leaves the company, voluntarily or involuntarily, doesn't go to work for a competitor or start a competing business. A noncompete agreement may appear in a separate contract or it may be one clause in a more comprehensive employment contract.
Noncompete agreements affect three groups of people: employers who wish to enforce them, employees who sign them, and the potential new employers of employees who have signed such a contract with a previous employer.
Laws Vary by State
Some states don't enforce noncompete agreements. Even in states that allow noncompetes, the laws regulating noncompete agreements vary greatly, which is why companies should definitely have an attorney help prepare their agreements. A noncompete agreement that is enforceable in one state may not meet the legal requirements of the next. An attorney can research state requirements necessary to create a valid contract, to make sure that the agreement won't be struck down by a court. The legal expense of reviewing or creating a company’s noncompete agreement pales in comparison to the cost of taking an employee to court to try to enforce an iffy agreement.
Typically, the employee must get something in exchange for signing a noncompete agreement. If signing the noncompete is a condition of getting a job, the job itself would suffice. If the employee is already working for the company, the employer would have to provide something more (such as a bonus or promotion).
Noncompetes Must Be Reasonable
Most states will enforce noncompete agreements only if they are reasonable. While the point of the noncompete is to protect the employer’s interests, the agreement cannot unfairly hinder the employee’s ability to earn a living in his or her chosen field. For example, the agreement is usually unenforceable if it restricts the employee from working in an entire field or industry.
A noncompete agreement should also include a time limit, as well as a geographical scope restricted to areas where the employer does business. Alternatively, some employers require employees to agree that they won't go to work for only a list of specific competing companies.
Noncompete Concerns for Employees
Noncompete agreements can turn into a huge hassle for employees. Many employees don't read there contracts carefully before signing them, particularly if agreeing to the terms is a requirement to get the job. When employees are starting a new job, they typically aren't planning ahead for what they will do next. However, once an employee moves on -- and particularly if the employee is laid off or fired -- a noncompete agreement can prevent the employee from easily finding new work. Especially in these tough economic times, restrictions on where and for whom an employee can work could wreak havoc on an employee's job search.
If you have any questions about a noncompete agreement you have signed (or been asked to sign), consider consulting with a lawyer.
Unrealistic or Poorly Crafted Contracts
The issues become further clouded when the initial non-compete agreement was poorly crafted or when its terms are unrealistic. If an employer is engaged in the business of selling cement in southern Missouri, for example, does that prohibit the employee from also selling cement in Nebraska? What if the employee wants to sell bricks in southern Missouri?
Many legal issues come up when a noncompete agreement is drafted or enforced. Both the employer and the employee should seek competent legal representation to ensure that these issues are fully resolved in a fair and equitable manner.