4 Reasons You Need a Non-Compete Agreement

A covenant not to compete, often referred to as a “non-compete clause,” is where one party promises not to engage in a similar trade or in certain acts of competition for a specified period of time within a designated geographical area. Non-compete agreements can be particularly useful for small businesses because they are inherently more vulnerable to outside forces than their larger and more established counterparts. Below we discuss the major advantages, as well as disadvantages, of non-compete agreements.

Advantages

1. Protect privileged information

Non-compete agreements prevent your former employees from working with a competitor for a set period of time at the close of their employment with you. Not only does this thwart your competitor’s ability to obtain classified information collected by your former employees, but it also precludes them from using your investment in their training against you. During the course of their employment and training, employees often gain access to the most privileged of information your company has to offer. Often, this ability to keep vital information secret is the difference between success and failure, particularly for smaller business with more limited resources.  If your employment agreement or non-competition agreement does not contain these protections, then you might want a stand-alone confidentiality agreement that defines what is protected, confidential information at the company and what restrictions an employee has with his\her use of that information.

2. Prevent unfair competition

A major advantage of these clauses is that they provide business owners with a level of protection in that they prevent others from either starting a new business in competition with yours or from giving your existing competition a leg up. Often, when an employee leaves to work for a competitor or to start their own similar business, they try to take your loyal clients with them. When combined, these elements create an unfair advantage that disrupts your existing client relationships and works against you by helping others compete.  In Virginia, the geographic bounds and the time limit of the restrictions on employee post-employment activities must be specifically tied to a legitimate business interest of the employer to be enforced.

3. Minimize risk of potential litigation

Litigation between you and a former employee can be expensive. By including a non-compete clause in contracts with your employees, you create the ability to shape your future against potential litigation. Not only is suing people expensive, but if you have no parameters set in place that your present and former employees must follow, then you may risk giving up any right to recover losses related to such events.

4. Protect your investments

As mentioned above, your company expends valuable resources whenever a new employee is hired. Hiring employees and keeping them on your payroll is a substantial investment that deserves protection. In limiting former employees’ ability to turn around and work for your competitor, your employees are also more likely to stay with you longer. This gives business owners protection of the investment put into their employees. Additionally, some non-competes may include a payback clause which can require employees to repay the employer for some or all of their training costs if they leave within a certain time frame after receiving certain training. Understand, though, that if the nature of the work the employee has been doing for the employer, both the skills developed and the time employee has been doing it, is so narrowly focused or so highly skilled or trained that the protection stops the employee from working at all, it is likely not to be enforced.

Disadvantages

A major disadvantage of non-compete clauses is that they are not enforceable in all states. Some states enforce the opinion that non-competes restrict a person from their constitutional right to pursue gainful employment. In these states, they may not hold your former employee to the restrictions of your non-compete even if they are in breach of it. Additionally, an employee may not be willing to sign right away and may seek legal counsel. This could be an added expense for your business. This is particularly relevant in specialized industries where finding other employment for former employees is difficult. These particular situations may deter potential employees from signing it at all, as they would not want to put their future work prospects at risk.  In Virginia, a non-competition clause or agreement, generally will be enforced if it is narrowly drawn in geographic scope and in its time limits so that it protects specific business interests of the employer.

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Wilson Law Group

Jim Wilson is the founder and principal attorney of the Wilson Law Group. For the past 25 years he has been combining legal dexterity with an entrepreneurial mindset to help aspiring and established business owners start, finance, buy, sell, and run their companies.

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