Four Things to Consider When Preparing a Non-Compete Agreement

Four Things to Consider When Preparing a Non-Compete Agreement

Non-Compete Agreements are everywhere. Most non-competes I see are not only poorly written (a style problem) and probably unenforceable against the employee (a drafting problem). Most employers take a one-size-fits-all approach and have all employees sign the exact same non-compete. Employers wanting employees to sign a non-compete agreement should take care to make sure that the agreement is reasonable in terms of time and geography limitations. The non-compete must be tailored to protect the employer’s business interests. Employers should analyze the risks each employee or class of employees present. The goal is to have a non-compete that can be enforced.

Before beginning the list, employers should recognize one key principle. Non-compete agreements are a form of restraint on trade and generally, restraints on trade are not favored by the Courts. A court will enforce a non-compete tailored to the employee protects the employer’s legitimate business interests.

Four Questions to Consider

  1.  What is the actual risk of this employee to your core business if they leave? This question goes hand in hand with the concepts of employee skill or employee direct contact with customers and vendors. An administrative assistant does not carry the risk as a top salesman. An IT expert is less important to the core business of a structural steel company than a structural engineer. Carefully consider your core business and the role each employee has in that core business. Also, consider the skill level of employees. Generally, a non-compete for low-skill and no-skill workers is not likely to be enforceable.
  2. How large is the potential customer based in your market niche? Employers will find it more difficult to enforce a non-compete if there is a broad market for your goods or service. A large potential customer based with relatively few companies in the market means a non-compete is likely to be seen as a restraint on trade. The notion seems counterintuitive, but an industry with fewer companies but a very large number of potential clients is less likely to have enforceable non-competes because
    1. the non-compete would result in an unreasonable restriction on the employee to practice their chosen profession (really disfavored by the courts); or
    2. would tend to create a monopoly (really, really disfavored by the courts).
  3. How unique are the services your company provides? The more specialized and niche your business, the more a non-compete becomes enforceable over the longer term. If your happens to be IT consultant for medical practices, with a specialty in setting up HIPAA compliant wide area networks, then the number potential clients needing that service might be small. You have a legitimate concern about training an employee in the niche and then having to compete against that employee if they leave your business. Striking a balance between this concern and the previous concern about the number of participants is the most difficult task when writing a non-compete.
  4. Can you achieve your goals with something less than a non-compete? As noted above, non-competes are considered a restraint on trade and thus not always well-received. But what if you can achieve your business protection goals with something less than a non-compete, such as a non-solicit agreement? A non-solicit agreement allows a former employee to ply their trade, even if it competes with yours, but excludes a small subset potential clients. Courts have a far less difficult time enforcing a non-solicitation agreement than non-competes, but it still takes some careful drafting.

Non-competes can a very important tool in a company’s HR tool box, but they are not a one-size-fits all document and careful analysis should be undertaken draft not only a reasonable non-compete on its face, but one that can be legitimately enforced against the employee should that become necessary.

If you need a non-compete agreement, please give me a call or send an email.