What is a non-compete agreement?
Non-compete agreements are contracts that prohibit employees from working with competitors for a certain period of time, depending on state-specific laws. During the stipulated time period, employees typically cannot reveal proprietary information, including information about clients or business practices, to other organizations. They can also restrict former employees from taking clients to their new employers or companies.
Employers may use non-compete agreements for protection and usually ask employees to sign them as part of their onboarding process.
Related: Onboarding Best Practices
Types of non-compete agreements
The following is a list of different non-compete agreements:
Non-solicitation of customers
This agreement prohibits employees from soliciting customers. Once the employee is separated from an employer, they typically cannot engage in similar business operations with that employer’s customers.
Non-solicitation of employees
Often referred to as a no-hire agreement, this agreement prohibits the solicitation of other employees. This non-compete stipulates that a separated employee cannot recruit coworkers for projects or other business opportunities.
Confidentiality or non-disclosure
This agreement prohibits the sharing of information, such as trade secrets or other details, with third parties. These agreements often last from the moment of employment to long after separation, if not permanently.
Considerations for creating a non-compete agreement
Consider the following steps when creating a non-compete agreement:
1. Check state laws
Each state has different laws and regulations regarding non-compete agreements, and in some states, non-compete agreements may be prohibited entirely.
2. Define the duration
Consider making your restriction reasonable. For example, you could choose a period between six months and three years in which the restriction remains active. You could also choose to extend the time period for higher-level employees, such as executives and CEOs.
3. Consider using specific and relevant parameters
Non-compete agreements are typically relevant to the type of business, industry and employees. Consider defining the geographical location and scope of work to be as detailed and specific as possible.
If your agreement outlines the scope of work, you may want to detail which tasks are allowed or not allowed. For example, if you develop accounting software, your non-compete agreement might specify that programmers cannot create accounting software for other companies for three years.
4. Provide a section for signatures
Give a copy of the non-compete to the employee and keep the original document in your records, according to state laws.
Non-compete agreement FAQs
Here are some frequently asked questions about non-compete agreements:
What are some common industries that use non-compete agreements?
Any company can use non-compete agreements if state laws allow it, but some of the most common include:
- Real estate
Should companies notarize their non-compete agreements?
Employers do not need to notarize non-compete agreements. The dated signatures of a company representative, such as a manager or HR representative, and the employee are typically sufficient. Check your state’s laws to learn more.
Does a witness need to sign a non-compete agreement?
There is typically no requirement for a witness to sign a non-compete agreement as long as both parties sign the document.
What is the difference between a non-disclosure and non-compete agreement?
A non-disclosure agreement is a confidentiality agreement. It restricts current and former employees from sharing sensitive information with other parties. Employees in high-level positions often need to sign NDAs. A non-compete agreement specifies that employees can’t work with competitors. In some cases, an NDA is part of a non-compete agreement.