Non-Compete Agreement: Protecting Your Business Interests
Non-compete agreements can protect your business from unfair competition, but they must be carefully drafted to be enforceable. This guide explains how to create effective non-compete agreements that comply with state laws.
What is a Non-Compete Agreement?
A non-compete agreement (also called a restrictive covenant) is a contract that restricts an employee or contractor from competing with their employer or client for a specified period and within a defined geographic area.
When Are Non-Competes Used?
Employment
- Protect trade secrets
- Prevent customer poaching
- Protect business relationships
- Safeguard confidential information
Business Sales
- Prevent sellers from competing
- Protect business value
- Ensure smooth transition
Independent Contractors
- Protect client relationships
- Prevent use of proprietary information
- Maintain competitive advantage
Enforceability Requirements
Reasonableness
Non-competes must be reasonable in:
- Geographic Scope: Limited to areas where business operates
- Time Duration: Typically 6 months to 2 years
- Scope of Activities: Limited to legitimate business interests
Legitimate Business Interest
Must protect:
- Trade secrets
- Confidential information
- Customer relationships
- Goodwill
Consideration
Employee must receive something of value (employment, promotion, severance, etc.).
State-Specific Laws
California
Non-competes are generally unenforceable for employees (with limited exceptions).
Other States
- Vary significantly in enforceability
- Some states restrict for lower-wage workers
- Some require specific consideration
- Check local laws
Essential Components
Parties
- Employer/Client
- Employee/Contractor
Restricted Activities
- Specific prohibited activities
- Industry restrictions
- Competitive activities
Geographic Scope
- Specific geographic area
- Reasonable limitations
- Based on business operations
Duration
- Time period of restriction
- Reasonable timeframe
- Consider industry standards
Consideration
- What employee receives
- Employment, promotion, severance
- Must be adequate
Exceptions
- Permitted activities
- Excluded situations
- Reasonable carve-outs
Best Practices
- Be Reasonable: Overly broad restrictions are unenforceable
- State-Specific: Comply with local laws
- Clear Language: Define restrictions precisely
- Adequate Consideration: Ensure proper consideration
- Legal Review: Always have employment lawyers review
Common Mistakes
- Overly broad geographic scope
- Unreasonable time duration
- Prohibiting all competition
- Insufficient consideration
- Ignoring state restrictions
Using Our Template
Our free Non-Compete Agreement template provides a reasonable structure. However, non-competes are highly regulated and should always be reviewed by employment legal counsel, especially given state-specific variations.
Conclusion
Non-compete agreements can protect your business, but they must be carefully drafted to be enforceable. Use our template as a starting point and always consult with employment lawyers familiar with your state's laws.
