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What You Need to Know Non-Compete Agreements for Your Employees

Posted by Darryl V. Pratt | Jul 04, 2019 | 0 Comments

A small business that has invested substantial resources in  developing a product or a customer base could be devastated if its employees  then go to work for a competitor down the street or set up their own competing  business. A noncompetition agreement is  an important tool that could protect your business from former employees who  could otherwise reveal or use your sensitive information, trade secrets,  strategies, or customer information for the benefit of a competitor. These  agreements are not favored by the courts, however, because they place a  restriction on workers' ability to freely earn a living (and a few states  refuse to enforce them at all). If you choose to require a non-compete  agreement for employees, it is important to keep the following factors in  mind.

1) Your business must have a legitimate, good faith reason  for the non-compete agreement. As  mentioned above, if your business has trade secrets or other information that  is a valuable asset needing protection, a non-compete agreement is more likely  to be enforced by a court. On the contrary, if an employee does not have  access to valuable or sensitive information, a non-compete agreement is likely  to be seen as merely punishment for leaving your business. In those  circumstances, it is unlikely to be enforceable. Be careful about which  employees you ask to sign non-compete agreements. A receptionist at the front  desk is less likely to have confidential business information than a key  manager, so a non-compete agreement precluding the receptionist from working  for a competitor probably would not be considered a justifiable restriction.

2) The non-compete agreement must be reasonable. Different states have varying standards about what  restrictions will be considered “reasonable.” What is seen as reasonable will  also vary based on the type of job the employee held, as well as the type of  business. You should err on the side of the minimum duration needed to protect  your business. A lifetime restriction is almost never enforceable, but a  one-year restriction may be deemed reasonable, for example, for an employee  who has had access to your customer information. The non-compete agreement  also should only cover the geographic region in which your business operates.  A restriction covering the entire state will be considered unreasonable if  your business only provides services or goods in one county. In addition, the  non-compete agreement must not restrict an employee from performing a completely  different job for a competitor. If your salesperson takes a job as an interior  designer for a competitor, he or she is less likely  to use “insider” information gained while employed by your company against you  in the new position because the duties performed will be quite different.

3) Provide a benefit to the employee to compensate for the  restriction. If you require a new  employee to sign a non-compete agreement as a condition for hiring that  employee, the employee is receiving the benefit of a job with your business.  However, if you require someone who is already employed by your company to  sign a non-compete agreement, it is important to provide an additional  benefit, such as a raise, to increase the likelihood that the agreement will  be enforceable.

4) Weigh the pros and cons. Although non-compete agreements do protect your business's trade  secrets, sensitive information, customers and more from being disclosed to a  competing business, they may also discourage some potential employees from  accepting a job with you or prompt existing employees to leave rather than  sign the agreement. Along with the concerns about their enforceability, this  is another reason to impose only the minimum restrictions needed to protect  your business.

Give Us a Call

A non-competition agreement  should be customized and carefully drafted to meet the needs of your  particular business. We can help you determine which restrictions are  legitimate and reasonable to decrease its vulnerability to a legal challenge.  Give us a call at (972) 712-1515 to set up a meeting to discuss this and any other  employment-related concerns.

About the Author

Darryl V. Pratt

With over twenty (20) of experience as a dual-licensed Attorney and Certified Public Accountant, Darryl V. Pratt has practiced law in all areas of corporate and business law, non-profit law, estate planning, probate, guardianship, asset protection planning, bankruptcy (Chapters 7, 13 and 11), real estate, and taxation.

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