How often have you heard, “Congratulations, we would like to offer you the position, please sign this non-compete agreement?” Non-compete agreements are now a regular part of the employee-company relationship. At one time, they were more commonly a part of executive hiring. In recent times, it seems like non-compete agreements are part of every hiring process. Their ubiquity has led to people accepting them without much thought, but you do not have to take them at face value and without question. You have a lot of power to affect how a non-compete agreement affects you.
A non-compete agreement is a particular type of covenant to avoid employees becoming, or aiding, competitors. However, it is often used as a blanket term to cover several different agreement types:
- Non-Compete – an agreement that an employee will not create, or join, a competing business within a certain time frame, geographic area, or other limitation after leaving their current employer
- Non-Solicitation – an employee agrees not to contact the employer’s customers to sell them products and services that compete with the company’s products and services
- Non-Recruitment – an employee agrees not to contact former colleagues from the company in order to hire them
- Non-Disclosure – the employee agrees not to share information that could be considered proprietary or privileged with individuals or other entities outside the company
Non-compete agreements are largely designed to protect the employer but can protect the employee as well. The most obvious benefit is to protect the company’s market position and sales. It ensures that employees don’t become competitors. Likewise, it lets the employee know what activities and boundaries exist that they should be aware of when leaving the company.
There are other reasons for a non-compete beyond controlling competition. A non-compete can also be used to protect the company’s market edge and product. A more cynical side of the non-compete agreement is to retain talent. Employees restricted from taking a job in the same area or industry by a non-compete, are less likely to leave a company and more likely to accept negative conditions (like low pay).
Non-competes work by restricting an employee’s options after leaving the company. A well-written agreement will try to accomplish this goal while still giving the employee the ability to work. Timing is one of the most common of restrictions. Typically a non-compete will restrict former employees from working in the same field for some number of months or years. The time can vary greatly depending on employer and industry. Geographical restrictions are just as common. This restriction limits former employees from accepting employment within some amount of distance from their former employer. Beyond time and geography, there can be industry specific and regionally specific restrictions.
Employers use non-compete agreements to protect their business, so it is reasonable for the employee to review the non-compete with an eye to protect themselves. Non-compete agreements are not set in stone, and you do have the right to challenge them. Here are some things you can request to make sure the non-compete is not too restrictive:
- Negotiate: It can be intimidating as a prospective employee to ask to negotiate a non-compete agreement, but you are fully within your rights to do so. Ask to have any clauses that you feel are overly restrictive to be changed. For example, ask that the time restriction is lowered from 6 months to 3 months if 6 months would too harshly limit your options. You can also ask to have clauses added. For example, ask the company to replace a geographic restriction with a list of specific companies.
- Rejection: Employment is usually contingent upon accepting a non-compete agreement. However, you can refuse to sign the agreement. You might lose the opportunity or the company might be willing to consider an alternative agreement, such as a nondisclosure instead.
- Consideration: Non-compete agreements have to be offered with some form of compensation to the employee. They are asking you to give up something (potential employment) so courts have reliably stated that the company must give up something in exchange. For new job hires, the new position is the usually the employee’s compensation. However, if a company asks an existing employee to sign a non-compete, then it must come with some compensation to supplement the employee’s regular salary, such as a new position, a raise, bonus, or some other perk.
- Attorney Review: You never have to sign a non-compete agreement immediately. You always have the option to have it reviewed by your legal counsel. Your start date might be moved, but it can be worth it to ensure you are not entering into an unbalanced situation.
It is also important to understand the limitations of a non-compete agreement. Companies are not allowed to go beyond a reasonable restriction:
- General is Harder To Enforce: A non-compete agreement is not allowed to prevent you from working at all. Traditionally, the more general and open an agreement is, the less likely a court will rule to enforce it. If the non-compete is too broad, you can ask for it to be made more precise. For example, instead of signing a document that restricts you from working in the “software industry,” ask to have it modified to be limited to the “software based sales-force contact management” space.
- Jurisdiction Matters: Individual states have jurisdiction over non-compete agreements, there is no federal counterpart. Therefore, every non-compete will list the state the agreement is bound to in case of a breach. A company will usually choose a business-friendly jurisdiction. Investigate the agreement’s state to get a feel for how courts in that state rule on non-compete covenants. If your state has a good track record with employee friendly decisions, then ask to have the jurisdiction changed to avoid the potential hardship of travel.
- Considered on A Case By Case Basis: Courts overwhelmingly try non-compete breaches on a case-by-cases basis. Neither you nor your employer should consider any non-compete iron clad. The court will base any decision on how the non-compete affects a particular employee’s situation. For example, a non-compete might limit an employee from working for a competitor within 50 miles, only to find it unenforceable against a clerk who has few employment options in their area. Alternatively, the court might find that this restriction is reasonable for a senior executive with the ability to easily relocate.
- Transfer of Ownership: If a company is acquired, the non-compete agreements that employees signed with the previous company may not transfer with the acquisition. In some states, the acquiring company will need to have new non-competes signed or obtain employee permission for the previous non-compete to transfer over
Non-compete agreements are so commonplace now as to almost be expected. Do not let their ubiquity lull you into apathy. A non-compete agreement can have a very real impact on your future opportunities. This can give the employee a lot of power to negotiate with. Make sure that any non-compete you sign is as fair for the employer as it is for you.