A noncompete clause is an important way for you to protect your business. This type of clause is used with employees to ensure they won't leave your employment and go work for a competitor, or work for themselves in your field immediately after leaving. It also prevents them from competing against you while they are working for you.
Enforceability of Noncompete Clauses
A noncompete is great for your business. It helps ensure that an employee will not take the knowledge and contacts they gained while working for you and use them to benefit a competitor, or to set up their own business that can compete against yours.
The problem with noncompete agreements is that they can severely limit a worker's ability to support themselves. The employee may not be qualified for a job in any other industry and such an agreement can make it very hard to find work. Some states (California, North Dakota, and Oklahoma) completely prohibit noncompetes because of this. Other states make them difficult to enforce; check your own state laws to determine what applies to you and your business.
In general, the more specific and narrow the agreement is, the more likely it is to be upheld in court if there ever is a challenge to it. Naming specific companies as competitors and setting up a short window during which the agreement is applicable can mean a court would be more likely to approve it if there were ever a challenge.
Setting Up a Noncompete Clause for Employees
You can choose to have an employee sign a stand-alone noncompete clause or you can include it as part of the larger employment contract you offer your employees.
The noncompete should specify:
- The specific industry or niche the employee is prohibited from working in
- Whether the agreement is limited to a geographic area
- How long the employee is prohibited from working in that industry
Noncompete Agreements and Non-Employees
Noncompete agreements can be used with independent contractors or subcontractors you work with, as well as with your own employees.
However, as with employees, these agreements may not be enforceable for independent contractors and subcontractors because they can severely limit an individual's right to support themselves. An independent contractor has to be able to work for a variety of businesses and they are likely in the same industry. A noncompete could be very difficult for the worker to honor.
Alternatives to Noncompete Clauses
While a noncompete gives you—as an employer—a high level of protection, they can be unfair to employees or contractors you work with, and they may not be enforceable in court. There are alternative agreements you can use that can offer your business similar protection, even if the noncompete is struck down or if you decide not to use one:
- Nonsolicitation agreement. This agreement prohibits your employee or contractor from looking for work from your competitors or your clients. It can also state that the employee or contractor is not allowed to attempt to hire away your employees.
- Nondisclosure agreement. A nondisclosure agreement is a standard agreement used in employment and independent contractor situations. It prevents the worker from sharing your proprietary information with competitors or anyone else. This gives protection to your trade secrets and any other information you deem confidential.
You can create a noncompete agreement yourself, or you can work with an attorney or online service provider to create one for your company. A noncompete agreement can help protect your company from ex-employees or independent contractors who might otherwise go work for your direct competitors and use important knowledge about your business and clients to benefit someone else.