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Noncompete Agreements

by on
in Employment Law,Human Resources

One of the risks you run when key employees quit is that they could potentially leak valuable information. If you take the precaution of having them sign covenants not to compete and confidentiality covenants when they join your organization, you may be able to limit this risk.

The enforcement of such covenants depends on the individual state, and some states refuse to sanction any kind of noncompete clause. Be sure to check with your attorney about the legality of any agreement you’re considering.

Other factors to consider when drafting noncompete covenants:

1. The agreement must be reasonable. If you take too many options away from the employee, the entire contract may not be enforceable and courts will view it as a “restraint of trade.” When the job market is tight, ex-employees have fewer job alternatives and may have little choice but to work for your competitors. In this case, the courts would be more likely to invalidate an unreasonable agreement.

Reasonable, in the view of most courts, refers to the time period and the geographic area. For example, preventing a hairdresser from working as a stylist for two years within a 50-mile radius of your shop is probably reasonable, while preventing her from working in the profession anywhere in the country for 10 years probably isn’t. The restrictions should be broad enough to protect you from competition, yet narrow enough to allow the person to make a living.

2. The covenant must have mutuality of obligation. A noncompete covenant is a contract, and in order for it to be valid, both parties must have obligations to fulfill. If you make the noncompete agreement part of the original employment contract, the quid pro quo for agreeing not to compete is the job itself under some states’ laws.

3. Covenants ride up the job ladder. Like other elements of employment contracts, the noncompete provision stays with the employee throughout the term of employment. You don’t have to draw up a new one every time you promote the employee. However, you may want to execute new covenants with new considerations when an employee is promoted, receives expensive training or is exposed to particularly sensitive information or trade secrets.

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