When hiring others to work on your team, it is a good business practice to require employees and consultants to sign 'non-compete' agreements so that they won’t:

• leave and start a competing company;
• go to work for a competitor;
• solicit customers; or
• use and/or disclose company confidential information.
• A non-compete agreement should include:

(1) Business interests being protected.

Non-compete agreements are enforceable to the extent that they protect legitimate business interests. It is important to identify the specific business interests being protected (such as customer information, proprietary methods and tools, company confidential information including trade secrets).

(2) Description of duties.

The type of position and duties greatly influences the individual’s access to company confidential information and the potential for harm to the company. Hence, post-employment restrictions are more appropriate for someone with access to key technologies or key customers than for an entry-level person. Using the same non-compete for all employees can backfire. The non-compete needs to be tailored to the specific situation. If the duties or position change (for example, an employee is promoted), a new non-compete may need to be prepared and signed.

(3) Clear definition of restricted activities.

The law favors allowing people to earn a living in their chosen profession. Overly broad restrictions are not enforceable. To make the agreement 'reasonable' (and hence more likely to be 'enforceable'), consider focusing on specific restrictions such as: restricting solicitation of customers; working for specific direct competitors; or limiting the applications/markets in which the person is restricted from working.

(4) Duration of the restrictions.

The length of the restrictions must also be reasonable. A reasonable term for a non-compete for a traditional company may be one year after termination of employment. For Internet companies, the reasonable term may be 6 months because the technologies and markets are changing so quickly.

(5) Geography of restrictions.

Reasonable geographic restrictions may be 15 miles from the current location for retail, or 50 to 100 miles depending on the business. For Internet-based businesses, geographic restrictions must be carefully defined since websites can be accessed from anywhere on the planet.

(6) Allowable activities.

Allowable activities probably include working for non-profits or non-competing companies. For consultants, who frequently work for a number of companies in the same industry, I recommend adding language that states that “the hiring company acknowledges that you perform similar work for other companies in the _________ industry and that nothing in this agreement precludes you from such work as long as the confidentiality of the hiring company’s confidential information is preserved.”

(7) Disclosure of prior non-competes.

Previously signed non-competes should be disclosed so that there are no surprises from a former employer seeking to enforce restrictions.

(8) Assignment of Rights.

It’s important to establish that the company owns the rights to inventions created by employees or contractors. This language can be included in a non-compete agreement or other documents related to the worker or project.

(9) New Employee or Current Employee.

New employees can be asked to sign non-competes. But, be cautious about forcing current employees to sign non-competes. To be enforceable, a non-compete must be supported by “consideration.” “Consideration” is a legal term for something of value. If the non-compete is signed prior to beginning employment, hiring is the “consideration.” For existing employees, something of value (in addition to their current compensation) must be given. Examples of “additional consideration” include a promotion, bonus, cash payment or gift certificate.

(10) Reasonableness.

The non-compete should state that it is reasonable and that the employee/contractor acknowledges that it does not unduly restrict post-employment opportunities.

In conclusion, reasonable non-competes can protect an employer’s interests without unduly restricting an individual’s future options. Using a boilerplate agreement, "one size fits all situations" is not a good approach. You are better served by tailoring an agreement to the specific employee/contractor and identifying the specific business interests being protected.

While enforcement varies from state to state, the basic rule is that non-compete agreements are enforceable if they:
– are fair and reasonable (in scope, duration & geography);
– protect legitimate business interests; and
– do not impose substantial hardship (preclude a person from earning a living).

Jean D. Sifleet, Esq., CPA
Business Attorney
120 South Meadow Road
Clinton, MA 01510 USA
t. 978-368-6104
f. 978-368-6105
c.978-618-2162
www.smartfast.com

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Jean Sifleet, business attorney, CPA and three-time entrepreneur, is pleased to announce the release of her new book, Advantage “IP”: Profit from Your Great Ideas. Visit the Smartfast Bookstore for details, and to order the book.