Draft an Employee Noncompete Agreement

Especially if you're just starting your business, you may be concerned about the possibility that you could train someone who works with you for a year or two and then takes everything they learned from you to a competing company. The fear is that the competitor would then get all of the benefit of your carefully honed trade secrets and business practices without any work or investment in their development. You can draft an employee noncompete agreement to alleviate this threat, but you must take care to ensure it isn't so broad that a court refuses to enforce it.

Steps

Organizing the Agreement

1. Search for forms or templates. If you don't have a transactional attorney to draft contracts for your business, you typically can find templates online that you can use to create an employee noncompete agreement.
   • Some websites offer basic templates for free, but keep in mind that these templates typically are generic in nature and may not conform to your state's law.
   • You typically must pay for a form or template agreement designed to be enforceable in a particular state.
   • You also may be able to find agreements used by other companies that you can use as a guide, but remember to tailor any such agreement to the needs of your business, rather than simply copying it verbatim.
2. Check your state's law. Noncompete agreements are unenforceable in some states and extremely restricted in others, so before you start writing your employee noncompete agreement you must make sure it falls within the guidelines of your state law.
   • Noncompete agreements are outright illegal in some states such as California. If the agreement is separate, it simply will not be enforced. However, if your noncompete agreement exists within a larger employment agreement, the presence of the illegal noncompete may void the entire contract.
   • Many other states such as Texas have laws regarding the interpretation of these agreements that strongly favor employees over employers in the event of a dispute.
   • You should consult a business attorney if you have any questions as to whether noncompete agreements are enforceable in your state. Attorneys who specialize in business and employment contracts will be up-to-date on any legal trends and have first-hand knowledge of how courts in your area handle noncompete agreements.
3. Identify the parties to the agreement. Use the first paragraphs of your agreement to establish the name and place of residence of the employee signing the agreement, as well as your name, your role in the company, and the company's place of business.
   • You also should identify the role of the employee in your company. Keep in mind that many courts won't enforce noncompete agreements signed by low-level employees who can't do anything to seriously harm your business, even if they go to work for a directly competitor.
   • Briefly describe the nature of your company's business, as well as what the employee will be doing for your business. Stress the unique contributions the employee will make and the level of access they will have to trade secrets or confidential information as a result of their role in the company.
4. State the purpose of the agreement up front. Since courts already disfavor noncompete agreements, this is not the time to hide the ball. Title your document "Employee Noncompete Agreement" and restate in the introduction what type of agreement it is.
   • This also ensures that the employee knows up-front what type of agreement they are signing.
   • Typically you want a noncompete agreement that is separate from any other employment agreement, and made with its own separate consideration.
   • A separate agreement protects any other contracts between you and the employee in the event your state law changes or a court declines to enforce the noncompete agreement.

Setting Reasonable Terms

1. Identify the business interest you're protecting. Courts treat noncompete agreements less harshly when it is clear that the employer has a significant and legitimate business interest they are seeking to protect.
   • Be specific about the harm that will come to your company if the agreement is violated, and what you want to protect.
   • A legitimate purpose for a noncompete agreement would be to keep someone from taking advantage of your employee training to learn how to operate that type of business efficiently, then using all that information to open their own business and compete with you directly.
   • Moving to a pre-existing business already in direct competition with you is another threat. However, you must be careful to state your purpose clearly. You typically cannot restrict an employee from moving to another employer in a similar, but not identical, business.
   • Beyond protecting key trade secrets, the agreement should emphasize the time and effort that you've put into research and development of your business.
   • A noncompete agreement should be designed to safeguard that investment, and keep someone else3 from unduly profiting off the time and effort you've put into learning your industry and carving out your place in it.
   • Keep in mind that the noncompete agreement generally should be the least restrictive means of protecting your business interest. If there is some other way your business interest could be protected without restricting the actions of an employee after they've left your company, a noncompete agreement is not legally appropriate.
2. List the specific information covered. Being specific rather than using vague categories increases the chance that your agreement will be enforceable, and provides the employee with the guidance they need to avoid disclosing sensitive information and inadvertently violating the agreement.
   • Require the employee to promptly return any manuals, client lists, or other company documents to you without copying them.
   • Include specific activities prohibited to the employee after they leave. These activities should be limited to those that would obviously harm your business in a significant way.
#*For example, you might prohibit an employee from soliciting your clients, attempting to hire your employees, or starting up a new business that directly competes with yours.
   • You don't want to prohibit the employee from engaging in too many activities. Think about the relationship of the activity to the business interest you're seeking to protect through the noncompete agreement, and only include activities that have a close nexus to that interest.
3. Limit the period of time the restrictions last. Industries are dynamic, and information that could have been detrimental to your business if disclosed five years ago is probably irrelevant now. Your employee noncompete agreement shouldn't last any longer than the information has value.
   • The length of time an employee noncompete agreement's restrictions last is one of the most important factors to judges when they determine whether the agreement is reasonable and should be enforced.
   • If you have restrictions lasting longer than necessary, a judge may refuse to enforce the agreement at all.
   • For example, if you impose restrictions lasting five years, a judge may rule the agreement is unenforceable and let your former employee of the hook for a breach – even if you brought your lawsuit only six months after they left your company.
   • Typically, judges will consider your noncompete agreement reasonable if restrictions only last between six months and two years.
   • However, reasonable duration also depends on the facts of the case. You may have different durations for different restrictions within the same agreement depending on the length of time the information has value, or that activity would have a significant impact on your business.
   • For example, if you have a restriction prohibiting the use of a confidential client list, its duration may be longer than a restriction that prohibits the employee from going to work for a direct competitor.
   • Stealing your clients would have a serious detrimental impact on your business, regardless of whether it took place six months or six years after the employee left your company.
   • Generally, narrower, more specific restrictions can have a longer duration. However, restrictions that broadly limit a former employee's activities should have a shorter duration.
4. Define a small geographic scope. While it's understandable that you wouldn't want a former employee to open up a shop across the street and use all your secrets against you, if they move to a company in the same industry located in another state, it's unlikely anything they do will actually affect your bottom line.
   • Be specific with geographic limitations, and provide names of locations rather than general areas. If you intend to restrict the employee's ability to work for a direct competitor in the cities or counties in which you do business, name those places specifically.
   • Keep in mind that courts typically won't enforce an agreement that purports to restrict an employee's activities in an area where you don't do business when the agreement is signed. It doesn't matter if your growth plans include expansion to that area.
   • If you have written growth plans in place, you may want to create zones with varying degrees of restrictions. This can tie in to the duration for which restrictions will be in effect.
   • For example, the employee may be restricted from going to work for a direct competitor in the same city for three years, and from going to work for a direct competitor elsewhere in the same state for one year.
5. Include specific penalties if the agreement is violated. You must go to court to enforce the contract if the employee breaches it, but specifying penalties in the document itself can lessen the chances of your lawsuit getting thrown out.
   • This same portion of the agreement also should state which court is the proper venue for any lawsuits for breach of the agreement, as well as which state's law will be used to interpret the agreement.
#*When you make your choice of law, avoid the temptation of using the laws of a state that are more liberal or friendly to noncompete agreements than the state in which you do business. If you have no legitimate ties to that state, a court may rule that choice of law invalid.
   • Employee noncompete agreements typically specify injunctive relief as the remedy for breach. This means the court can order the employee to stop engaging in whatever activities violate the noncompete agreement they signed with you.
   • You also can include specific monetary damages to which you are entitled for breach, but keep in mind that courts tend to look on these statements with more hostility. You're already potentially putting the person out of work with a court injunction – asking them to pay you money on top of that can be seen as unreasonable.

Ensuring Enforceability

1. Provide valid consideration. Employee noncompete agreements are contracts like any other, and must be supported by valid consideration or they are not enforceable in a court of law. If the noncompete agreement is not signed as a condition of employment, you must offer the employee something else in exchange for their signature.
   • Typically you must offer the employee money, or additional stock options, in exchange for their signature on an employee noncompete agreement.
   • This consideration is more likely to be considered valid if it has value in proportion to the value of the restriction, or the activities the employee is being asked to give up.
   • Providing separate consideration for the noncompete agreement increases the chances that if a court finds the noncompete agreement unenforceable, other contracts or agreements you've made with the employee will remain enforceable.
2. Tailor the agreement to each employee. Different employees have access to different information and could potentially damage the company in different ways. Courts are more skeptical of agreements that seem to be made of generic boilerplate signed by every employee.
   • Analyze carefully the position of each employee you want to sign an employee noncompete agreement. Although you may have a basic form agreement, you should not include any restrictions in an individual agreement that don't apply to that employee or reflect their role in your company.
   • Keep in mind that the purpose of the agreement is to protect your company's valuable information, and the investment you've put into building and growing your company – not to punish employees for leaving you.
   • Make sure each agreement is drafted narrowly to reflect the training the employee receives, the information to which they'll have access, and the role they have in your company.
3. Use the agreement sparingly. Not every employee is going to damage your business if they go to work for a competitor – even one located across the street from you. Good judgment dictates only requiring a noncompete agreement when absolutely necessary.
   • For example, if you own an ice cream shop, you may have a legitimate business interest in protecting your ice cream recipes and your ingredient lists.
   • However, a court is unlikely to uphold an employee noncompete agreement you have every teenaged cashier sign before they come work for you part time at minimum wage.
   • Courts are much more likely to understand an employee's ability to significantly damage your business if they are someone who has a large stake in the growth and development of your company.
4. Keep up to date on your state's law. Because judges are generally opposed to noncompete agreements, the law on what is and is not enforceable in a given state may change frequently, necessitating changes to your employee noncompete agreement.
   • Keep track of the employee noncompete agreements you have, and review them at least once a year.
   • Compare your agreement to any recent cases in the state appeals or supreme court to ensure they remain valid and enforceable.
   • If you discover that an employee noncompete agreement signed in the past is no longer enforceable, assess the situation. You may want to consider having the employee sign another noncompete agreement that you've modified to comport with the law as it currently applies.
   • Keep in mind that any modified agreement signed must be supported by additional consideration to be a valid legal contract.

References

See also

• Sue the Government for Discrimination
• Claim Age Discrimination for Apprenticeship Programs
• Help Avoid Employee Lawsuits
• Verify Rehab Treatment for an Employee
• Handle Disciplinary Actions
• Claim Weight Discrimination
• Know if You Should Sign a Covenant Not to Sue
• Defend Yourself in a Wrongful Termination Lawsuit
• File Charges With EEOC
• Defend Yourself in an Asbestos Exposure Lawsuit

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