To enter into some companies, new employees must sign a non-competition agreement. These contracts typically take effect after the employee leaves the company and prohibits them from working with competitive businesses. While these agreements are designed to protect the best interests of the employer, namely trade secrets and goodwill, many legal disputes over these contracts have become the subject of court debate. Some are saying the contracts encroach on the employee’s right and ability to earn a living. When brought to court, non-competition agreements face heavy scrutiny.
The Components of a Valid Non-Competition Agreement
What are the requirements for a valid non-competition agreement?
- It must protect a legitimate and business-related interest for the employment enterprise.
- It must be reasonable in time period, geography and general scope.
- It must have a valid consideration when the new employee signs it.
What is a valid consideration? When the employee signs this agreement, he or she must receive something valuable in return. If the employee signs the contract before the first day on the job, the opportunity of employment is considered sufficient. Conversely, if the contract is signed mid-employment, the employee must receive something of value not originally offered in the original employment agreement. This might be a promotion or a similar benefit.
What Is a Legitimate Business Interest?
If you have legitimate business Interests to protect, you might want to use a non-competition agreement to protect those trade secrets. For example, Google is notoriously secretive about its search engine algorithms. With over 80 percent of the world’s search engine traffic, Google has nothing to gain from another search engine such as Bing suddenly gaining access to their algorithms. In Google’s case, the company could reasonably argue that the information gives the company a competitive advantage and it underwent extensive measures to maintain secrecy. In a court of law, the company has a strong defense for a non-competition agreement.
Being Reasonable Is the Ultimate Goal
If your agreement is taken to court, the legal process must decide how to balance your company’s interest with that of your employee. It’s imperative that the duration, geographical region and scope make sense within the context of each case. For example, imagine a technology company such as Apple or Samsung, which regularly release phone updates around the world. Assume the non-competition agreement is meant to protect the updates related to a new and revolutionary operating system. It doesn’t make sense to say the logo designer can’t work for a similar technology company. This individual doesn’t know anything about the coding or intricate details of the program. For this case, a non-disclosure agreement might be more applicable.
On the other hand, a programmer for the operating system has significant knowledge of the company’s inner workings and may take those revolutionary updates to a competitor. For the programmer, a non-competition agreement would make sense for a period of time. However, once the operating system is outdated, the programmer’s knowledge won’t be valuable. In this case, the non-competition agreement might only last a year or two given how fast technology advances. The key to having a valid and successful non-competition agreement is to make it reasonable.
Should you employ a non-competition agreement, make sure it makes sense within the context of that employee’s job duties and access to important company information. If you are taken to court and the agreement is found to be too invasive, the court will amend it and enforce a reasonable version. As you move forward in developing your agreement, be sure to contact a legal professional to ensure you adhere to federal and state regulations. Additionally, consult with industry leaders and contacts to better understand what is most common in your niche. Use this guide to help you get started with your non-competition agreement.
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