What is a Non-Compete Agreement? Understanding the Basics (2022)

Employees and employers enter into a non-compete agreement in which the employee agrees not to work for a competitor company in the same industry during or after employment.

A non-compete agreement is a legal contract that is drafted by the employer in order to make sure an employee cannot work in highly competitive industries and reveal crucial information to other companies.

The length of these contracts varies, but they generally last for the duration of employment with the business and for a specific time after.

In this article, we’ll look at non-compete agreements in more detail. We’ll discuss the industries that tend to use these types of agreements, analyze the pros and cons, and go into more depth about enforcing a non-compete agreement.

If you’re thinking of breaking your non-compete agreement, it’s essential you do your research beforehand in order to avoid any legal problems with your employer.

What is a non-compete agreement?

1. What is a non-compete agreement?

2. What are the industries that use a non-compete agreement?

3. What are the advantages and disadvantages of a non-compete agreement?

4. What happens if you break a non-compete agreement?

5. Are non-compete agreements enforceable?

6. Biggest mistakes with non-competition agreements

7. Things to pay attention to when dealing with non-compete clauses

8. Non-compete agreement structure sample

What is a non-compete agreement?

A non-compete agreement is a contract between the employee and the employer. These contracts state that during a certain time, the employee is not permitted to work for a company in the same industry as the employer’s company.

Employers often use non-compete agreements in order to protect themselves against former employees revealing sensitive information or secrets about their business operations.

This can include future products, marketing plans, public relations, employee salaries, and much more.

Non-compete agreements also prohibit the employee from interviewing for the competitor’s roles. Any disclosure of sensitive information could result in a potential lawsuit, which is why employees should take non-compete agreements seriously.

What are the industries that use a non-compete agreement?

Some industries take non-compete agreements more seriously than others.

One of the most common industries that present employees with a non-compete agreement is the media. Because many of the employees are the face of the company, there is a legitimate concern about switching to a competitor company and negatively affecting loyal viewership.

For example, in 2016, Buzzfeed fired two popular employees after they appeared in a web-series that doesn’t belong in the company. The firings came as a surprise to current employees who hadn’t realized how strict their non-compete agreements are.

Along with the media industry, non-compete agreements can also be found in the IT sector due to the important information employees work with.

These types of contracts can also be found in health industries as well as tech, fintech, crypto, and many more. The non-compete agreement we have available in our templates is easy to customize to suit a variety of industries.

However, it is important to note that just because a business uses a non-compete clause, it doesn’t mean that it’s automatically enforceable.

What are the advantages and disadvantages of a non-compete agreement?

One of the biggest advantages of a non-compete agreement is keeping crucial and sensitive information private. This provides a layer of security for the company, especially if it operates in a highly competitive industry.

Unfortunately, some businesses develop unethical practices when it comes to revealing information about their competitors — this can often include interviewing and hiring competitors’ employees. By enforcing a non-compete agreement, companies can protect their crucial strategies and products.

However, many see non-compete agreements as a nuisance.

In 2020, a Journal of Law and Economics report revealed that one in five American workers sign a non-compete contract.

What do we find?

Using data on over 1.7k workers bound by noncompetes, we first show that workers default beliefs are that noncompetes are enforceable, even where they are not.

69.2% of workers whose noncompetes are unenforceable believe them to be. pic.twitter.com/7s4R6ngRvx

— Evan Starr (@evanpstarr) July 9, 2021

In July 2021, Joe Biden signed an executive order that would largely ban or limit non-compete agreements.

The decision comes from a statistic that between 36 and 60 million workers are negatively affected by these agreements.

With unemployment being on the rise, non-compete agreements may prohibit workers from continuing to work in their desired industry.

As many companies prefer candidates to have industry-specific experience, it may mean that former employees may have a hard time getting a job elsewhere.

Opinion on the advantages and disadvantages of non-compete agreements is divided, as businesses see the agreements as a crucial step to protect their internal information.

Employment and labor attorney Mark Kruthers proposed that instead of a complete ban, the current Administration should consider implementing regulations to ensure all agreements are reasonable and fair to everybody involved.

What happens if you break a non-compete agreement?

Although many companies enforce non-compete agreements, employees regularly work for their previous employer’s competitor.

Of course, this depends on the industry. Should you consider this option, you must familiarize yourself with the possible outcomes of breaking your agreement. If you break a non-compete clause, your employer can take you to court and file a formal lawsuit.

Research showed that thousands of non-compete lawsuits occur in the U.S each year. Wall Street Journal confirmed that lawsuits increased from 2002 to 2013 by 60%.

There are several types of lawsuits companies can enforce in this case. These include:

1. Injunctions

This is one of the most common types of lawsuits employers tend to use when an employee breaks the non-compete agreement.

Before an injunction takes place, the employer will use a lawyer to write to the employee. The employee is served with an order to leave the new employer due to a breach of contract.

This way, the employer avoids going to court. However, the employee can use a lawyer to make changes to the proposed order and reach a settlement.

This may be a costly procedure, which is why it’s essential to hire a solicitor if you’re served with an injunction order as an employee.

2. Compensatory damages

The employer has to present an itemized report of financial damages being made due to the breach of contract.

Depending on the severity and importance of the information shared, the financial damages can range from minuscule to large.

This information is often included in the contract itself or is presented at court.

3. Punitive damages

To receive punitive damages, the employer has to prove that the employee leaving was involved in malicious conduct that directly hurt the company.

If you vindictively leave a company with a clear intent to hurt their reputation, that employer can sue you for punitive damages.

However, the employer needs to present clear evidence of malicious conduct taking place before they can claim punitive damages.

For example, if a departing employee tried to recruit existing employees to leave with them, the employer would most likely need to present clear evidence that this communication took place.

Many non-competition clauses include a section that states that an employee is prohibited from encouraging other employees to leave.

It may also contain a clause that states you are not allowed to recruit any of the employer’s customers to your new business.

4. Liquidated damages

Liquidated damages are a part of the non-compete agreement contract. The employee has to pay a specific amount stated in the contract in order to compensate for leaving the company and working for a competitor.

The employee leaving will need to pay these costs themselves unless otherwise specified in the contract. The sum of money depends on each individual contract, industry, and employer.

Injunctions, compensatory damages, punitive damages, and liquidated damages are some of the most common lawsuits companies seek after an employee breaks the non-compete agreement.

If this happens to you, it is absolutely essential to get a solicitor and make sure the agreement you signed was reasonable before agreeing to take the issue to court.

Are non-compete agreements enforceable?

Non-compete agreements cannot be enforced unless they are reasonable. Different states have different rules on whether businesses can enforce these types of agreements at all.

For example, the California Business and Professions Code Section 16600 states that California-based businesses cannot enforce a non-compete agreement. Any contract that includes one is automatically void, regardless of whether it is reasonable or not.

However, there are several limitations to this rule. According to Code Section 16602, the agreement may be enforceable when there is a dissolution of a partnership or a limited liability company.

Non-compete agreements are also banned in North Dakota. Colorado also considers non-compete clauses void, unless they fall under specific circumstances.

These can be found through the Colorado Court of Appeals. Every other U.S state, including Georgia, Texas, and New York, have enforceable non-compete agreements.

However, whether an employer is allowed to take legal action depends on the reasonability of the contract.

If you’ve entered a non-compete clause but are now looking to leave your current employer, it’s worth taking these points into consideration:

• Are the time limits reasonable?
• Are the geographical limits reasonable?
• Are general restrictions reasonable?

If the answer is no, there may be a chance that your non-compete agreement is not enforceable. However, it is essential you consult a solicitor rather than act on your own accord and dismiss your current contract.

Unfortunately, it’s not easy to predict whether the contract will be automatically unenforceable. The court can interpret the clause to work in your or in your employer’s favor.

Always make sure you check whether the clauses are strictly defined — this should give a clearer idea of whether the court will end up enforcing the agreement.

Biggest mistakes with non-competition agreements

Companies can make a lot of costly mistakes when they demand non-compete agreements. These include making every employee sign the contract when that may not be needed.

These mistakes can also allow the employee to get out of their non-compete agreement without breaking the law.

Some agreements may have a long restriction period and have an overly broad restriction, which would make the court see the agreement as unreasonable.

For example, an agreement with a duration of six months is often seen as more reasonable than a year-long restriction. Businesses should also be as specific as possible and avoid vague clauses.

In order to make the agreement enforceable, companies should always try to provide a non-competition agreement with value to the employee.

Many companies make the mistake of having existing employees sign a new non-competition contract, but refuse to give them a bigger salary or new responsibilities in return. It’s important to remember that a non-compete agreement should be negotiable in most cases.

If you’re an employer, it’s essential that you remain open to the employee’s concerns regarding the agreement and remain open to communication and potential adjustments to various clauses.

Companies should always consider legal advice in order to draft the best possible agreement and avoid a one-size-fits-all approach.

If you’re served with a non-competition agreement, you should always make sure that your employer’s expectations are reasonable.

However, you must take your contract into consideration when interviewing with other companies, no matter how you feel about your current employer.

Non-compete agreements vary by state — only California and North Dakota have an outright ban on these types of contracts.

You will be able to find legal information about non-compete clauses in your state on the state government’s website and in any legal policies.

It’s important to remember those non-compete agreements are also different from non-disclosure agreements (commonly referred to as NDAs). A non-compete clause is focused on preventing an employee from working for a competitor altogether.

An NDA is more focused on preventing the employee from revealing crucial information to anyone. This can include any projects you are working on, client list, creative work, strategies, and much more.

In some cases, a non-disclosure agreement may be better than a non-compete agreement. For an exceptional NDA, check out our template.

It will let you craft a professional, detailed agreement to protect your business or reassure your clients with just a few clicks.

Finally, always pay attention to non-compete clauses if you work in the media industry and are the face of the company.

If you are interviewing with a competitor, make sure you do not disclose any trading secrets or confidential business information while talking about your current work.

Non-compete agreement structure sample

This is an example of what a non-compete agreement may look like. Lengths of non-compete agreement contracts vary per industry as well as per each individual employer.

It’s important to ensure that employers seek advice from a solicitor to ensure their agreements work best for their specific industry.

However, the initial structure is the same for every agreement. This includes a preamble, which displays important details of the contract and who the involved parties are, as well as the official agreement.

PandaDoc’s full non-compete agreement is a thorough and versatile template that can be customized with your information to suit your business’s needs.

Every non-compete agreement consists of the following structure:

Preamble: Shows important details of the document and names of the involved parties.

This is an Agreement between [EMPLOYEE] (“You”) and [COMPANY] (“Company”). The Agreement is effective on _____ (“Effective Date”).

By confirming your employment at [COMPANY], you agree to the following legally bound conditions:

Agreement: The length of the agreement may differ, but you can expect to find several points, including the ones outlined below.

1. Term of Agreement: The term clearly states when the agreement comes into effect and until when it lasts, including the dates of restriction after the employee’s termination.
2. Limitations of this Agreement: Here, the contract will describe the nature of the contract and gives a brief description of what the limitations of the agreement are for the employee.
3. Covenant not to compete: Describes exactly what the employee is agreeing to by signing the contract. This includes the time period and mentions other conditions, such as industry and geographical location conditions (e.g., cannot work for a competitor within a certain area).
4. Non-solicitation: This is the section that states the employee should not solicit any employee or independent contractor on their behalf or induce any other employee to terminate their contract with the company.
5. Soliciting customers after termination of agreement: States that the employee is not permitted to disclose any information regarding the company and its customers to competitors.
6. Injunctive relief: This section explains what the consequences of breaching this contract would be.
7. Severable provisions: Here, you can state that even if one or more provisions aren’t enforceable, other provisions may still be enforceable and legally binding.
8. Modifications: This section states your modification proposals. Typically, any modifications should be agreed upon in writing.
9. Prior understandings: This section explains that this agreement supersedes any prior contracts signed by the employee.
10. Waiver: Describes your waiver conditions.
11. Jurisdiction and venue: This area includes an agreement to submit to the jurisdiction paragraph and acknowledges the state where employment takes place.

Signatures of both parties: After a closing statement, both parties clearly sign and date the agreement to make it official

IN WITNESS WHEREOF, each of the Parties has executed this Contract, both Parties by its duly authorized officer, as of the day and year set forth below.

(Signatures)

In conclusion, non-compete agreements should be thoroughly looked over before signing. If you’re a business, you should make sure your limitations are reasonable and create a contract that benefits you as well as your employee.

Many solicitors specialize in developing non-compete agreements that take the nature of your business and your employees into consideration.

If you’re an employee, you should always make sure you pay attention to your non-competition contract before interviewing with any potential competitors.

The consequences for breaching a non-compete agreement can be large and costly. If you’re served with legal papers after you leave your employee, it’s best to consult a solicitor before moving forward.