Whether you’re an employer or employee, chances are you’ve run across a non-compete agreement at some time or another. They’re surprisingly common, yet workers often mistakenly sign one without thinking it through. And on the flip side, employers can struggle to enforce a poorly drafted non-compete. With room for mistakes on both ends, it’s time to shine some light on how these agreements are drafted and their potential impact.
What is a non-compete agreement?
Let’s start with the basics: A non-compete agreement is a contract typically between an employer and its employee, but they are also sometimes used within co-owners of an organization. Usually, the agreement restricts a person from working at a company’s competitor or creating a competing business during or after their employment. The intent is essentially to protect business trade secrets, proprietary knowledge, and access to customers. These agreements can be critical to help ensure customers aren’t wooed away by a former employee or that direct competition with insider knowledge doesn’t suddenly pop up nearby.
Five essentials of a robust non-compete agreement
Many courts do not smile upon non-competes, simply because they can be seen as inhibiting a person’s ability to make a living. So, a non-compete agreement needs to be drafted carefully and include reasonable restrictions to help it hold up in a court of law. The following areas are important components of a solid non-compete.
- Minimal length of time
A non-compete agreement usually restricts a former employee for a set period of time. Once the time is up, the employee can work where and how he or she chooses. In general, a non-compete agreement will last three years or less. However, in some cases, Indiana courts have upheld non-competes lasting up to five years. When drafting your own, keep in mind that less time is often better if your agreement is ever contested in court. - Limited geographical area
Non-competes should include a limited location. If the restricted area is too broad, the contract could be vulnerable to invalidation. What stands as reasonable will depend upon the company and type of work done. For example, a doctor’s non-compete agreement may include the city where he practiced, plus a 30-mile radius. But it probably shouldn’t restrict a doctor who worked in Indiana from opening a practice in New York. - Reasonable scope of restricted activities
In general, the court is more likely to uphold an agreement with limited restrictions. Typical limitations include contacting existing customers, working for a direct competitor, or opening up the same type of business nearby. So as an employer drafting a non-compete, think carefully about what ex-employee activities might harm your business. - Specialized info worth protecting
Known as “protectable interests,” examples include goodwill, confidential information, proprietary formulas, customer lists, and insider business secrets. In Indiana, the courts have consistently ruled that common skills, routine knowledge, and general information do not count as things a business needs to protect. - Valuable consideration
The courts look for benefit on both sides when examining non-competes. If the agreement is contingent upon employment, then the job itself will suffice. However, when a non-compete is signed after employment begins, the worker is usually offered a monetary bonus or raise in exchange.
With the increased prevalence of non-compete agreements, it’s important to understand the ins and outs before drafting or signing one. At BB&C, we handle both sides of non-competes. Whether you’re a business owner or an employee, we have the expertise to tackle your unique challenges. Contact Stuart Boehning at 765-742-9067.
Disclaimer:
The content of this blog is intended to be general and informational in nature. It is advertising material and is not intended to be, nor is it, legal advice to or for any particular person, case, or circumstance. Each situation is different, and you should consult an attorney if you have any questions about your situation.
