Non-compete agreement: Overview, definition, and example
What is a non-compete agreement?
A non-compete agreement is a legally binding contract between an employer and an employee (or contractor) in which the employee agrees not to engage in certain activities that compete with the employer's business for a specific period of time and within a certain geographic area after the employment relationship ends. The purpose of a non-compete agreement is to protect the employer's confidential information, trade secrets, and business interests by preventing the employee from using that information to directly compete with the employer or work for a competitor.
For example, a company may require its salespeople to sign a non-compete agreement to prevent them from joining a competing company or starting a similar business within a specified time frame after leaving the company.
Why is a non-compete agreement important?
A non-compete agreement is important because it helps protect a business’s intellectual property, client relationships, and competitive position. By restricting former employees from immediately joining competitors or starting similar businesses, employers can safeguard sensitive information, prevent knowledge spillover, and maintain market advantage. Non-compete agreements also provide a sense of security to businesses that rely on proprietary technologies, client lists, or specialized training that would be difficult to replicate.
For employees, non-compete agreements can limit job opportunities in the same industry, so it is important for the terms to be fair and reasonable in scope, duration, and geographic reach.
Understanding non-compete agreement through an example
Imagine an employee who works for a software company as a developer. The company requires the employee to sign a non-compete agreement that restricts them from working for a competing software company or starting their own software development business for one year after leaving the company and within a 50-mile radius of the company’s headquarters. The purpose of this agreement is to prevent the employee from using the proprietary software and knowledge gained while employed to directly compete with the company.
In another example, a high-level executive with a marketing agency signs a non-compete agreement that prevents them from working for any competing marketing firm or starting a competing agency in the same city for two years after leaving their current position. The goal is to protect the company’s client relationships and strategic marketing techniques that the executive would have access to.
An example of a non-compete agreement clause
Here’s how a non-compete agreement clause might look in a contract:
"For a period of one (1) year following the termination of employment, the Employee agrees not to directly or indirectly engage in any business that competes with the Employer within a 50-mile radius of the Employer's primary place of business. This includes, but is not limited to, working for, consulting with, or owning a competing business in the [insert industry]."
Conclusion
A non-compete agreement is a key tool for businesses to protect their competitive advantages and prevent former employees from using confidential information or expertise to compete directly. While non-compete agreements can be important for safeguarding business interests, they must be fair and reasonable in terms of duration, geography, and scope to be enforceable. For employees, understanding the implications of such agreements before signing can help manage career opportunities and future employment prospects.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.