What is a Non-Compete Agreement?
A Non-Compete Agreement is a formalized agreement commonly made between an employee and employer where the employee agrees to not enter into competition with the employer when they leave the company.
When two parties share sensitive information, there is potential for one party to exploit that information to gain an unfair competitive advantage. This Non-Compete Agreement formalizes the business relationship and provides legal remedies in the event of a contract breach.
This agreement prohibits the employee from entering markets or starting businesses that might cause the employee to gain a competitive advantage against their former employer. For instance, the employee might gain an advantage by exploiting trade secrets or other confidential information. The employer may only restrict competition for a set time.
By signing a Non-Compete Agreement, an employee agrees not to work for a competitor during their current employment or after their employment ends, within certain limitations.
How effective is a Non-Compete Agreement?
Courts may not enforce a non-compete clause if:
- The effect could be harmful to the public (if it restricts commerce and depresses the local economy)
- The scope is broader than necessary to protect the employer
- The restriction would cause undue hardship on the employee (too difficult for the employee to find a new job)
- The agreement has unreasonable time or geographic restrictions
For example, consider a worker at a telecom provider. The company includes a clause in the Employment Contract that restricts the employee from working for a competing provider for a certain amount of time. Courts may consider the restriction reasonable for a top-level executive with access to lots of information about the company, such as business plans or financial information. However, even in that case, courts may consider it unreasonable if the contract completely restricts working in the telecom industry if the employee leaves the company.
However, courts generally consider a non-compete to be a legally binding document. A judge should uphold the contract, as long as it isn’t too broad or restricting.
How do you create an enforceable non-compete?
If you are hiring someone with a Non-Compete Agreement, there are a few things to consider. When crafting a non-compete clause, keep the following in mind:
- Keep your restrictions reasonable: Be reasonable with your restrictions and how long you hold ex-employees to them. Consider reasonable geographical restrictions in your clause.
- Consider your industry: Will you provide industry-specific training to your employees or give them access to trade secrets that would give their future employees an advantage? If not, there might not be grounds for a non-compete.
- Contracts should offer consideration: Are you offering something (such as an Employment Contract) in exchange for signing a non-compete? It may be difficult to ask a current employee to sign this contract without providing some form of compensation, such as a bonus or additional vacation days.
- Avoid ambiguity: Vague clauses are difficult to uphold. Be specific when creating your non-compete. It’s unlikely that a court will uphold broad, vague restrictions.
- Make sure it is necessary: A Non-Compete Agreement should protect a business or company. The court might ask a company why a clause is necessary for its protection if a former employee challenges the non-compete.
What does a Non-Compete Agreement include?
You can create a Non-Compete Agreement for several different arrangement types, including:
- Employment/Service: a non-compete for an employee or contractor
- Purchase/Sale: a non-compete for commercial negotiation
- Invention: a non-compete for the disclosure of intellectual property
Provide information on both you (the organization/individual) and the other party, including details like a specific job description. These details about the other party should clarify why the restrictions in place are reasonable.
Decide the terms of your non-compete clause, including:
- The length of the restrictions
- The area in which the non-compete clause applies to the employee
You can also choose to insert a non-solicitation clause. A non-solicitation clause prevents the employee from inducing other employees or contractors into leaving the employer or interfering with the employer's relationship with their other employees in general. As a result, the employee cannot invite the employer's other staff or workers to move to another workplace.
You and the other party must sign the agreement. You might also wish to have the document signed by a witness.
You can customize LawDepot’s free Non-Compete Agreement for anywhere in Canada (including Ontario, British Columbia, and Alberta) except Quebec.
Can an independent contractor be held to a non-compete?
Yes, you can create a Non-Compete Agreement for an independent contractor. Just like regular employees, independent contractors can still challenge the Non-Compete Agreement in court if it interferes with their right to earn a living. Make sure that a Non-Compete Agreement is necessary to protect your company.
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