Non-Compete: Everything you need to know
The non-compete agreement is used to avoid competition between two parties, typically an employee and an employer. The agreement puts a prohibition on the employee from working for or becoming a competitor for a certain period. The non-compete agreement also puts restrictions on the party (employee here) from working for a competitor in the same market or starting up another business in the same field.
The agreement, also known as a non-compete covenant, comes with a certain set of features. some key features of such an agreement are:
- Duration: The agreement has a finite time duration till which it remains active. The agreement, in most cases, is valid till the completion of the period of employment. The agreement is a part of the Contract Act that operates in our country.
- Legality: A non-compete agreement comes with statutory or legal backing. It is regulated by respective acts of each of the states in the US; for example, the Fla. Stat. § 542.335, Section 542.335(1)(b) provides for enforceability in Florida. The section also provides for the protection of the other party's (Employer) interests under the agreement.
- Leave Clause: The agreement also carries a leave clause, also known as the garden leaves clause. As per it, the employer is required to pay salaries to the employees during the period of the agreement. The clause allowing for the salaries post-termination of the contract is, however, something not seen in most of such agreements generally.
- Unilateral Obligation: The non-compete type of agreements come with a unilateral obligation. Such agreements are the ones where one party shares confidential information with the other. Thus, the obligation is on the other party to keep the promise. In this case, the obligation is on the employees to keep the agreement.
- The Clause of Exception: Non-compete agreement, like most legal agreements, carries an exception clause. This calls for the breach of agreement on the part of the employee in certain exceptional cases. In that case, the employee would not be charged guilty for breaking the agreement.
- Compensation Clause: The compensation clause comes into effect in case of willful default of the agreement by the 2nd party, that is, an employee. It calls the employee to reimburse the employer for the breach of contract causing the damage to the business of the employee.
Furthermore, the non-compete agreement can have additional clauses and features. However, the above-mentioned ones are the basic or core of the features that are common to all such agreements. The addition of features of more clauses and conditions is also based on the mutual understanding and agreement of the parties involved.
How It Works
Having understood the features of the non-compete agreement, it's important to know how it is put to work or what enforceability.
- The agreement has a specified date from which it comes into effect. That date is usually the date on which both parties sign the given agreement.
- The agreement also has a specific location that would be covered under its ambit. Say, for example, if the agreement is signed in Florida, then the obligations under the agreement may be applicable for that very region only. That is, the 2nd party or employee is free to compete in any other region.
- Jurisdiction is another important part of the enforceability of the agreement. That is, in case of the breach of the agreement, judicial authorities of which region would be reached first by the aggrieved party. Taking the example of New York again, we would say that the jurisdiction of such an agreement would be New York County Supreme Court and other lower judicial authorities in the state.
- The amount of compensation in case of breach of the contract to be provided by the 2nd party (Employee) is also a part of the working of the agreement. Further, it also provides for how compensation would be provided to the aggrieved party.
- In case the agreement is signed for an employing company that is a part of a group and employs, the employment agreement does not need to be applicable for all firms. That is, the agreement can apply to the firm employing the employee in actuality and providing for the salary. It would not be applicable for the other firms of the group generally. However, as a special clause or extension, this can be made possible. Provided if both parties agree.
Read more on the implementation of non-compete clauses in US labor markets here.
Benefits of Non-Compete Agreement
The non-compete agreement comes with its own sets of benefits for party 1, that is, the employee. As by now, we have seen that it prevents the business competition for the employers by its very nature it brings in other benefits too. somese benefits include:
- One major benefit of the agreement is that it safeguards the secrets of business to be utilized by the employer. That is, it prevents the exploitation of employers by safeguarding trade secrets.
- Another benefit of the agreement for the employer is that it incentivizes providing specialized training to the employer as the agreement comes with an obligation period which can sync with a minimum service period post-training for the employees.
- The agreement also prevents unfair competition, which ultimately has an effect on the consumers in the market.
Learn why companies use non-compete agreements in this article.
Drawbacks of Non-Compete Agreement
Along with its benefits (which are in favor of the employer as per the nature of the agreement), the non-compete agreement carries some drawbacks. These are mostly from the perspective of the employee. some drawbacks include:
- One major drawback is that the agreement reduces the bargaining capacity of the employee. Further, it reduces the scope of exploration of opportunities for them.
- The agreement kind of puts restrictions on the employee, which doesn't go well with them. An employee likes to work with free will without any restrictions. Making them sign an agreement as compulsion can be a turn-off for them. This can hinder performance as well.
- The agreement is costly to enforce. For a firm, it might be manageable to manage the legal expenses for enforcement. However, most of the time, an employee can't manage it. Thus, it is a burden from an employee's perspective.
- Geography, or what is called location for enforcement, is a limitation of the agreement that surely affects the employers. The agreement carries its enforceability and jurisdiction for a particular location. Thus, there is a threat to business even if the agreement's terms are not breached. This article details the enforceability of non-compete agreements in different US states.
A non-compete agreement carries its pros and cons. One set of features gives an edge to the employee while others tilt it in favor of the employer. However, the overall nature of the agreement keeps the employer's perspective in front.