What is a Non-Compete agreement?

What is a Non-Compete agreement?

  1. What is a non-compete?

A non-compete is a term used in contract law under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer).

  1. Why do companies like using non-competes?

Employers may require non-competition agreements for a variety of reasons, including protection of trade secrets or goodwill. The fear is that when an employee resigns or is terminated the employee may start working for a competitor or start their own business by exploiting the information of their former employer’s operation. However, courts generally disapprove of non-competition agreements as limitations on a former employee’s right to earn a living.

  1. Does every state enforce non-compete agreements?

The majority of U.S. states recognize and enforce various forms of non-compete agreements. However, some states – like California – ban non-competes except in limited circumstances. In order to be considered a valid non-compete agreement it must do three things. Be supported by consideration at the time it is signed; protect a legitimate business interest of the employer; and be reasonable in scope, geography, and time.

  1. Is the employee compensated for the non-compete?

Generally, the employee must receive something of value in exchange for the promise to refrain from competition. However, if an employee signs a non-compete agreement at the beginning of employment the employment itself can be considered sufficient enough compensation for the non-compete.

  1. What is the most important parts in a non-compete?

The three most important things in a non-compete are the duration, scope of employment, and the geographic radius of the agreement. For the most part, if any is found to be an unreasonable restriction, the agreement as a whole will be declared invalid.

  1. What is duration? How long is reasonable duration for a non-compete?

Duration restrictions are how long it is until the contract expires. Michigan courts have not found non-compete durations in excess of three years to be reasonable, but the standard one year duration has been consistently deemed reasonable.

  1. What is the scope of employment? What is reasonable for the scope of employment?

The scope of employment is how the employer has limited the employee’s ability to find work in similar fields. A reasonable non-compete may prohibit a former employee from working in a very specific subset of an industry, but a non-compete that prohibited a former employee from working for a competitor in any capacity, even in a position wholly unrelated to the employee’s former work, would be unreasonable.

  1. What is geographic radius? How far can the distance be to be reasonable?

Geographic radius restrictions have to do with where the employee can be restricted from working. For instance, the agreement may specify a certain town or region where the employer does business. A non-compete agreement is unreasonable if it limits a former employee’s ability to work for too long over too large an area. A non-compete clause that prohibited competition over the entire nation would never be reasonable, but one that prohibited working for competitors in a radius of several miles around the employer’s place of business may be reasonable.

  1. Can I get my agreement looked over by an attorney before I sign?

Typically employers will give you some time to consider an agreement before signing it. You may even be able to request from your employer some time to look it over. Some businesses even expect employees to do just this, and you are not risking anything by asking for the opportunity.