Employee Noncompete & Nonsolicitation Agreement
Employee Noncompete & Nonsolicitation Agreement
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When you’re a successful business owner, there’s always the risk that an employee will quit and start a business similar to yours, or move on to a rival business—after learning how to succeed by working for you.
A noncompete agreement—formally called an “Employee Noncompetition and Nonsolicitation Agreement” or sometimes “covenants not to compete” —can prevent former employees from creating, or working for, a competing business.
Important to Know: Noncompete Agreements are Restricted in Some States
California will not enforce a noncompete agreement against employees. And other states—including Alabama, Colorado, Louisiana, Montana, North Dakota, Oklahoma, Oregon, South Dakota and Texas—have laws that limit the use of noncompete agreements. If your business is in one of the states listed here and you want to use a noncompete agreement, consult an employment law expert.
No matter where your business is located, you may ask an employee to sign a slightly different document, call a "Nondisclosure (Confidentiality) Agreement" which prevents workers from disclosing client lists, processes, secret recipes or techniques—all the special things about your business that give you a leg up on the competition.
Used separately or together, Nolo’s noncompete and nondisclosure agreements can help you protect your hard work, safely and legally.
Do all states enforce noncompetiton agreements?
Noncompete agreements (also known as "covenants not to compete") are not universally enforced from state to state. In other words, simply signing a noncompete does not always mean that the courts in your state will enforce all of the provisions of the agreement. Below we have provided a brief synopsis of some state rules. Keep in mind that this is not an exhaustive list of state laws, and these laws may change.
- California. California refuses to enforce noncompete agreements between employers and employees except when the employee has an ownership interest in the business or the noncompete agreement is being used in the sale of a business. Consult an attorney when attempting to use a noncompete in California.
- Colorado. With the exception of "executive and management personnel and officers," or "employees who constitute professional staff to executive and management personnel," Colorado prohibits employees from entering into noncompete agreements with their employers.
- Florida. Florida law states that a noncompete agreement can be used only: (1) to protect trade secrets or valuable, confidential business or professional information; (2) in relationships with specific prospective or existing customers, patients, or clients; or (3) in extraordinary or specialized training. The law also imposes time limits on such agreements and a noncompete agreement with a duration of six months to two years is assumed to be reasonable and enforceable.
- Hawaii. Hawaii prohibits noncompetes unless the restrictions are reasonably necessary to preserve trade secrets.
- Massachusetts and Washington. A noncompete is enforceable in these states only if it is necessary to protect a legitimate business interest, reasonably limited in time and doesn’t violate "the public interest."
- Montana. Montana refuses to enforce noncompete agreements between employers and employees except when the employee has an ownership interest in the business or the noncompete agreement is being used in the sale of a business. Consult an attorney when attempting to use a noncompete in Montana.
- North Dakota. North Dakota has a law prohibiting noncompete agreements between employers and employees except when the employee has an ownership interest in the business and the business is being sold. Consult an attorney if attempting to use a noncompete in North Dakota
- Oklahoma. Oklahoma refuses to enforce noncompete agreements between employers and employees if (1) the former employee directly solicits the sale of goods, services, or a combination of goods and services from the established customers of the former employer, or (2) the employee is also a part owner of the business and the business is being sold. Consult an attorney if attempting to use a noncompete in Oklahoma.
- Oregon. Noncompete agreements are enforceable in Oregon if they are entered into either (1) when employees are hired or promoted, or (2) qualify as a "bonus restriction agreement," in which case they can be entered into at any time during employment. A bonus restriction agreement forces an employee to forfeit any profit-sharing or bonus compensation if the employee competes against the employer after the employee leaves the company. You may want to consult an Oregon attorney if you want to make this type of agreement.
- South Dakota and Louisiana. South Dakota and Louisiana statutes prohibit noncompete agreements that last more than two years after an employee leaves the company.
- Texas. Noncompetition agreements are usually enforceable against employees in Texas provided that the employer gives the employee a benefit in addition to the job itself as compensation for signing the noncompete agreement.
- Arizona, Delaware, Illinois, Kentucky, Massachusetts, Tennessee, and Texas. These states prohibit noncompetes involving physicians. Some of these states, such as Alabama, also prohibit noncompetes against other professionals.
Do I need consideration?
When entering into a noncompete with an existing employee (not a new hire who signs the noncompete before beginning work), an employer must provide consideration – some bargained-for exchange. In some states, continued employment is sufficient consideration. But in other states – for example, Arkansas, Colorado, Connecticut, Hawaii, Minnesota, Montana, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia, Washington, West Virginia, Wisconsin, and New York, courts have either ruled that (1) continued employment is not sufficient, or (2) have not yet addressed the issue. Since state rules differ so much it's wise for employers to provide a current (existing) employee with a clear additional benefit in return for signing a noncompete agreement. This is not difficult. Just link the signing of the noncompete agreement to some benefit—for example, an increase in salary not automatically mandated by the company, a promotion, additional vacation time, or stock options.
What's the difference between a noncompetition and a nondisclosure agreement?
The primary justification for using a noncompete agreement is to prevent trade secrets from being disclosed to competitors. The difference between a nondisclosure and noncompete is that a nondisclosure prohibits disclosure to a competitor; a noncompete prohibits working for a competitor or starting a competing business. The advantage of a noncompete is that the employer doesn't have to be concerned about whether an ex-employee will use secrets at a new job, because the employee is barred from taking the new job.
How long can a noncompetition agreement last?
A noncompetition agreement cannot last forever; it must have a definite time limit. The shorter it is, the more likely it will be enforced in court if there is ever a dispute. Such agreements typically last for no more than six months to two years. Unless you are convinced that a longer period is necessary to protect trade secrets, keep the noncompetition period to two years or less.
Some states have statutes that limit the time. In Louisiana and South Dakota, for example, noncompete agreements that last more than two years are presumed to be unreasonable. In New York, depending on the circumstances, restrictions from one to five years are considered reasonable. But even in states with mandated limits, courts can review and shorten noncompetition restrictions they deem unreasonable.
Are there restrictions on the territory I can cover in my noncompetition agreement?
A noncompetition agreement should specify the geographic region in which it applies. It is prudent to limit restrictions to the geographic area in which your company does business or in which it has made plans to do business in the immediate future. A court may determine that anything broader than this is unreasonable. Of course, if you market your products or services to customers throughout the United States—for example, if you operate an Internet retailer or a software company—your noncompetition agreement may apply to the entire country.