For all businesses and companies, competition is a crucial element to encourage peak efficiency. Competition can be a strong force that drives the improvement of products and services, which increases profits while also creating useful developments for consumers and customers alike. To prevent unethical practices between businesses or individuals, companies can protect themselves through a Non-Compete Clause (NCC).
“Our role is to maintain and monitor a framework in which fair competition can flourish”
– Arthur Levitt
What is a Non-Compete Clause?
A Non-Compete Clause or Non-Compete Agreement (NCA) is a legally binding agreement used for companies to protect their interests at the end of a work contract for a consultant or employee. Within a business relationship, employers must reveal sensitive information about the companies. This kind of agreement is signed as part of the terms of employment by both the employer and employee.
The NCC offers a solution by preserving the confidentiality of data that belongs to the company. This may include customers and clients lists, marketing plans, or plans for future developments. All this information from the company is potentially useful for competitors or even employees who may depart in order to start their own competing business.
The Importance of an NCC
By drafting this kind of agreement, employers prevent current employees from exploiting the business data once the working relationship with the employee has ended.
An NCC is a contract in which the employee promises not to start a similar business where the use of the information disclosed by the company could be useful. At the same time, so as not to enter into competition with the employer, the employee also agrees not to work in a similar profession for a potential competitor. The NCC has an expiration date typically determined by the time that the company’s information can be considered useful.
When Are Non-Compete Clauses Used?
A Non-Compete Clause will be drafted by the employer when the company starts a contract with an employee. The objective is to keep the employee from sharing the information acquired after the working relationship with the company ends, and also from trading these secrets while the working relationship is still going on.
Another potential function of an NCC is utilized when the company hires a contractor or consultant. During their term of employment, the professional will often have access to potentially sensitive materials belonging to the company. The function of the Non-Compete Clause is to prevent the contractor or consultant from sharing information the company data or trading secrets with the company’s competitors.
In Mergers and Acquisitions cases, the seller of the company may also be required to sign a Non-Compete Clause. This may be necessary in order to prevent the potential seller from completing the transaction and then using materials meant to be included in the acquisition, such as client lists, to form a new business.
The Elements of NCC
The principal objective of this agreement is to guarantee that the employer´s investment of money and time in training the employee won’t be transferred to its competitor at its detriment. This kind of agreement needs to outline certain specific limitations not only for the employee but also for the employer to make it reasonable for both parties. The companies can tailor these clauses according to their needs, but they must include the following elements:
- Type of Employment: The employee of the company will be restricted from working for another company in the same industry. But, naturally, there will be no restrictions about working in a completely different field, and this must be specified. Clarity on this element prevents ambiguities, and it helps the employee to know the kind of work positions they can apply for once the working relationship is over.
- Duration: This is how long the employee must wait after their departure in order to pursue a job in the same industry. The details about this element may vary depending on the kind of work position, but it’s usually between six months and two years.
- Geography: This element of the agreement may allow the departing employee to seek a job in the same industry if the new employer is located outside of a specific radius.
- Competitors: In some instances, the company might be specific and detail the name of the competitors that the employee will not be able to work with after their departure.
Use ContractAwesome’s free platform to generate a Non-Compete Agreement.
Reasonable Terms for an NCC:
The reasons for including a Non-Compete Clause within a contract have to be considered sensible. Not all job positions are meant to include a Non-Compete Clause. Usually, this type of clause is drafted for employees that will have access to private or valuable information about the company.
Whether for the employee or the employer, arriving at reasonable terms for this kind of clause is essential. The enforcement of the agreement in the event that the employee violates the terms will depend on the content of the clause’s elements. Drafting an arrangement where the conditions are overly broad might be harmful to the company’s interests if a court finds it unfair for the employee.
Referring to the elements of the NCC, what can be considered reasonable in each case and the type of information that is meant to protect will vary from industry to industry.
- Reasonable duration of the clause: Usually, the criteria for defining a fair amount of time to preserve an employer’s confidential information is designated by the time this information will be considered useful.
- Reasonable geographical area: The geographic area covered by the agreement generally depends on the type and importance of service provided by the company. A geographical area greater than the area where the company operates is usually not considered to be reasonable.
The company has the right to preserve its confidential information. However, on that same note, former employees also have the right to find a job in order to earn their living. Finding reasonable terms for this clause should strive to strike a fair compromise between both parties.