Enforcing Non-Compete Agreements

If you worry that your employees will join a competitor, you may ask them to sign non-compete agreements. Non-compete agreements are a contract between an employer and employees, stating that the employee will not work for a competing employer for a period of time after their employment ends. The most common time frame is one year. These agreements often contain provisions against soliciting the employer’s customers or using confidential information or trade secrets.

These agreements can be enforced as long as certain conditions are met.

First and foremost, the agreement must be in writing and part of a contract. In addition, as the employer, you must be able to show that:

1. The employees received some consideration in exchange for the accord. When the covenant is signed before hiring, employment is the consideration. Individuals who are already employed before signing a non-compete agreement typically receive some form of severance or other benefits as consideration.

2. The agreement protects a bona fide business interest. The definition of a legitimate business interest is controlled by state laws, but it typically reflects the need to retain valuable customer relationships and/or to shield proprietary information from competitors.

3. The pact’s scope must be reasonable. This requirement is difficult to pin down and often results in court disputes. The outcome generally depends on the services provided by the employer and the interests at stake. The duration of the agreement is also key; a court my not uphold an accord that extends beyond three years.

Non-Compete Agreement are enforced in courts with regularity. Employers should get legal counsel to confirm the agreement is enforceable BEFORE presenting them to a key employee.  If you need help determining if non-compete agreements or other exit strategies are your best options, contact Kirsch CPA Group and we can help you determine the best path to take.