What Is a Non-Compete Clause?

Whether you're starting a new job or are negotiating an offer, you may be presented with a concept you're otherwise unfamiliar with: the non-compete clause, also known as a "non-compete." Whether it comes as part of a contract or as a stand-alone document, a non-compete is an agreement stating that an employee will not compete with an employer for a given period of time. Companies often require employees to sign non-competes to protect their business interests, but the enforcement of these contracts can be questionable.

How a non-compete works

If you're asked to sign a non-compete, you'll typically be agreeing not to compete with your employer for a specified period of time. That could be six months, a year, or even longer.

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What constitutes "not competing?" It varies depending on the contract or clause at hand. In some cases, not competing might mean not working for any company that competes with your employer within a specific radius (say, 50 miles), or not opening your own competing business within a certain timeframe. In other cases, a non-compete might contain a specific list of direct competitors you're not allowed to work for once your current arrangement comes to a close.

Why do companies insist on non-competes?

The main reason companies ask employees to sign non-competes is to protect their business interests. Imagine your company has developed a proprietary system for identifying new customers for online retailers based on certain demographics. If a competing company offers you a job, you might use your knowledge to help it develop a similar system, thus costing your original employer a fair amount of business. A non-compete is designed to protect your company from such an occurrence.

Non-competes are particularly common among high-level executives, because they're the ones who are most likely to be privy to trade secrets or key company data. But these days, employees across all levels are being presented with non-competes. In fact, as of 2014, a good 20% of employees were found to have signed a non-compete agreement.

Non-competes versus non-disclosures

Though non-competes and non-disclosure agreements often go hand-in-hand, they're by no means the same thing. Whereas a non-compete prohibits you from working for a competitor based on preset criteria, a non-disclosure prohibits you from sharing key company information, such as trade secrets, that you obtain over the course of your employment.

If you're asked to sign a non-disclosure agreement but don't have a non-compete in place, you're allowed to work for any employer that wants you once your current arrangement is terminated. However, you'll risk having legal action taken against you if you disclose trade secrets you picked up at your former job to your new employer.

Are non-competes enforceable?

Though non-competes can be extremely restrictive, the good news is that they're not always enforceable in practice. Some states, in fact, don't uphold non-competes at all. Still, you can't just sign a non-compete and assume it won't be upheld in court, because you could easily wind up bound to its terms depending on where you live and the nature of the agreement.

The reason non-competes aren't always enforceable is that they can be overly restrictive, and hinder employees' ability to find work and support themselves. That's something most courts take pretty seriously, and so in order to uphold a non-compete, a number of key factors are scrutinized:

• Length of time. A non-compete that covers a six-month period is more likely to be enforced than one covering a two-year period.
• Geographic radius. A non-compete that prohibits employment within a 30-mile radius has a better chance of being upheld than one covering a 200-mile radius.
• Limitations. The extent to which a non-compete limits employees will often play into its enforceability. An agreement that prohibits employees from working for a small list of competitors will generally hold up better than an agreement that's far more vague or broad.
• Reason for the agreement. A non-compete is usually more enforceable if it's designed to protect a specific, legitimate business interest. Since a high-level executive is more likely to pick up trade secrets than an administrative assistant, that executive's non-compete will typically be more enforceable than that of a lower-level employee.

Generally speaking, the more reasonable the non-compete, the better its chances of being upheld in court. If you're asked to sign a non-compete, it's important to review that document carefully and seek outside legal advice if its terms seem overly restrictive. Otherwise, you could end up unemployed for a period of time, and your career might suffer a serious setback.

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