There are few things more important to growing a business than having a good team behind you. By investing in employee training and development, you can all but guarantee that your company will improve as well. Sometimes, however, those employees will have other plans and may decide to leave you for a competitor or start their own business in your industry.
If this happens, how do you ensure your (now former) employees won’t share confidential information they came across while working for you? Well, that’s where non-compete agreements come in. Here’s how these contracts work and when to use them.
What Is a Non-Compete Agreement?
A non-compete is a contract between an employee and an employer that stops the former from competing with the business during and after their employment. Competition can involve many forms, from the employee sharing trade secrets to poaching your customers.
A non-compete can be a clause in an employment contract or a separate agreement. Either way, signing a non-compete can be very important if you’re hiring an employee who will have access to confidential information about your business.
When to Use a Non-Compete Agreement
Non-compete agreements are most commonly used in client-based industries where employees are tasked with building up their personal brand. For instance, a sales agent will have his or her dedicated clientele. Since your business has provided the services through which these clients were acquired, you’ll want to protect yourself from the employee taking them from you.
You should also use a non-compete if you’re buying a business. Otherwise, the seller may decide to establish a competing operation and steal their old customers back.
Alternatives to Non-Compete Agreements
Though non-competes are widely used in many different industries, there’s no guarantee they’ll hold up in court. Many courts are hesitant to enforce these contracts, particularly if they’re deemed unfair due to lasting too long, covering too large a geographical area, and so on. For example, a covenant not to compete in North Carolina can only be valid if it is (1) in writing, (2) made part of the employment contract, (3) based on valuable consideration, (4) reasonable as to time and territory, and (5) designed to protect a legitimate business interest of the employer. These stringent requirements cause many business owners to seek to protect their intellectual property in other ways.
For example, one thing you can do is list general responsibilities in your hiring contracts. This involves noting specific categories of confidential information. If your employee tries something untoward with your trade secrets, these definitions may be all you need in court.
You can also opt to enforce other agreements, such as a non-disclosure agreement. The main difference between a non-compete and non-disclosure is that the latter doesn’t prohibit employees from working for a particular employer or in a specific industry.
Finally, you can rely on federal and state protections. Under your state’s Uniform Trade Secrets Act, former employees who start working for a direct competitor aren’t allowed to benefit from your company’s confidential information. The Defend Trade Secrets Act is the federal statutory approach more recently enacted in 2016 to protect against the theft of trade secrets.