Legal Information for Entrepreneurs

Non Compete Clause

You've heard about non-compete clauses, but you've never actually seen one in practice. Before you draft a non-compete clause for your business, you need to know what it is, what it does and how you can use it to your advantage.

Non-compete clauses were once reserved for upper-echelon employees who had the knowledge and/or skills to present a legitimate threat after they become separated from service.

But these days, employers have expanded non-compete clause requirements to include a much broader segment of their labor forces.

Employees are much more resistant to non-compete clauses than employers, for obvious reasons. By signing a non-compete clause, the employee instantly reduces his value in the open marketplace. Employers, on the other hand, rely on non-compete clauses to protect their business models as well as the investment they have made in their workforce.

There are right ways and wrong ways to execute a non-compete clause. If you prefer to draft your own non-compete clause or non-compete agreement, we recommend having an attorney review the document before you place it into active service. Here are some of the other things you'll need to consider about the use of a non-compete clause in a small business employment context.

Overview

Non-compete clauses can appear either as a paragraph in an employment contract or as a standalone agreement. They are designed to protect the company from potentially negative outcomes associated with a key employee's exit from the business. To increase it's enforceability, the clause should address three important issues: (1) Geographic restrictions, (2) Prohibited activities or roles and (3) Duration of the non-compete limitations. Although many employers choose to require non-compete clauses as a condition of employment, others integrate a non-complete clause into termination agreements in exchange for a generous severance package.

Goals & Outcomes

The goal of a non-compete clause shouldn't be punitive. Nor should it unnecessarily restrict the employee's ability to earn a living in her field. Instead, a non-compete clause should be built around a legitimate reason why certain activities could jeopardize your business. In reality, most non-compete clauses are weighted to benefit the company. But for legal reasons, an effort should be made to protect the exiting employee's interests as well.

Other Considerations

• Non-compete clauses are often a negotiation issue between employers and employees.
• Employees usually receive some kind of benefit in exchange for the non-compete clause (e.g. a job, a raise, a severance package, etc.).

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