A noncompete agreement is an agreement between an employer and employee that the employee will agree to not work for a competitor immediately after leaving employment with the current employer.
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A noncompete agreement should define:
- What constitutes “working for a competitor”? This often comes down to working for a direct competitor in a similar role, but some employers create noncompete agreements that are much more restrictive. In some cases, they disallow working for any other firm in the industry, even if that firm was not previously a direct competitor or even if the employee would be in a different role. Most employers also include creating a new competing business.
- How long must the employee refrain from working with the competition after the employment with the current employer ends? This could be a year and often is. Sometimes, especially for sensitive roles, it may be even longer.
- What geographic area will be covered? The same state? Region? Nation?
- Will there be compensation for the employee to offset the noncompete requirement? Some companies offer a financial incentive to the employee as payback for their agreement to not take on work with a competing company. This can lessen the risk for the employee. Often when this is offered, it is also noted that the employee will owe the employer as well if the agreement is broken.
- Will the agreement be enforced if the employee is involuntarily terminated?
Bear in mind that there are legal limits to how restrictive these agreements can be on each of the above points. These limits can vary at the state level. Some states do not even allow noncompete agreements. Check with your legal counsel for more details on what is and is not allowed in your area.
Pros and Cons of Noncompete Agreements: The Employer Perspective
When it comes to noncompete agreements, there are pros and cons for both the employer and employee. Let’s take a look at these. Here are the pros from the employer perspective:
- Trade secrets and other confidential information may be protected in the short term.
- There is less likelihood of losing key customers when an employee leaves (as could be the case when an employee goes to a competitor or starts a competing firm).
- High-performing former employees will be far less likely to put their skills to use with the competition.
- Employees may not leave as quickly, thus giving the employer some protection of the investment put into the employees. Some noncompete agreements even include a payback clause, requiring the employee to repay the employer all or a portion of training costs if the employee leaves within a certain time frame after receiving the training.
Next, here are the cons:
- If an employee has been considering leaving the company, introducing a noncompete agreement along the way might hasten that decision.
- Introducing a new legal agreement introduces increased risk of being in a legal battle. The battle may be over the restrictions being too broad, for example. Or the employer may choose to legally pursue a former employee who breaks the agreement.
- Noncompete agreements may prove to be unnecessary in many cases since confidentiality and related clauses may already prohibit using any proprietary information in the future. As such, initiating a noncompete agreement could cause unnecessary angst among employees and reduce employee satisfaction without actually improving employer security. (This is not always the case, but it is important to consider).
- Courts do not like noncompete agreements that unfairly restrict an individual’s right to work. This view can make a court battle difficult to win, even if the noncompete agreement was clearly violated.
- Noncompete agreements may make your organization less attractive to potential new employees.
Pros and Cons of Noncompete Agreements: The Employee Perspective
Naturally, the employee will have a different perspective on signing a noncompete agreement. Some pros are:
- Willingness to sign a noncompete agreement may be the only way to gain employment with some organizations. (This can be viewed as both a pro and a con for the employee. It can be positive because it can be one final step in getting a job and can signal an employer’s vested interest in keeping the employee onboard.)
- Some noncompete agreements may contain a payout clause in which the employer agrees to pay a set benefit, such as a specified number of months of salary, in exchange for the employee not competing for a specified time. This is not necessarily standard, but it may be able to be negotiated in some cases.
- The other terms may be negotiable as well. Each topic—the length of time, the geographic scope, the compensation, and the defined competition—might be a negotiating point that makes the agreement more palatable. Employees may also try to negotiate that the agreement should be voided if the employee is terminated, thus reducing the risk.
Next, here are the cons:
- When facing a request to sign a noncompete agreement, an employee may need to seek legal assistance, which often comes with costs.
- Especially in specialized industries, it may make getting another job much more difficult. This is especially true if the terms are broad. And it often does not matter whether the employee left by choice. This point is of critical importance, and it is, in fact, a reason some employees may choose to not sign such an agreement, even if it means walking away from a potential job—they do not want to put their future work prospects on the line.
Employers must decide whether the benefits outweigh the risks, especially when it comes to employee satisfaction. Knowing the pros and cons from both perspectives can help make that decision easier.
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.