To Use a Non-Compete Agreement or Not? When and How Matters

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Ineffective ContractThey were once more of a tool to keep high-powered executives from pillaging the company coffers—whether in clients, ideas, even internal items with value, such as manuals—on the way to their next gig. But now non-compete agreements are common in smaller businesses, too. But with increased use has come some abuse, raising issues and challenges for business owners thinking about using them.

The past popularity of non-compete agreements was a direct outgrowth of needing to protect sensitive information, from software code to secret formulas to unique processes. But overuse is taking its toll, and many now find that their non-competes can’t be enforced, even in court. According to Small Business Trends, the popularity of non-competes is on the decline, and they’re increasingly seen as bad for business.

The message to small businesses: Use non-compete agreements sparingly or not at all. Using them only for staff who have access to genuinely sensitive information is just common sense and is more likely to get them enforced. What most businesses don’t do—but should—is put a process in place for the use of non-competes:

    • Identify your company’s truly sensitive information and list every person who has access.

 

    • Use a non-compete only with those individuals (Many businesses won’t have a list at all).

 

    • Given those subject to a non-compete something in exchange, like money or benefits.

 

    • Make your non-compete narrow and focused only on the sensitive and relevant, nothing broad or general.

 

    • Know the laws of your state (they vary) and what kind of agreement fits a given situation (for example, a non-solicitation agreement keeps employees from poaching clients or co-workers).

 

    • Work with an employment lawyer on a flat fee. Creating an agreement online is economical. But these sites rely on your descriptions, which may be inaccurate, making your agreement unenforceable.



If you still think a non-compete might be necessary for your business, it’s worth checking out sba.gov’s community blogs, where a number of guidelines for using non-competes appropriately have been spelled out. Among them: What to consider if you’re thinking about creating a non-compete to use in your business. First, have a solid business reason behind the agreement, and do your best to quantify it.

For example: You have a top-secret recipe for a popular food item. But if the recipe were shared with competitors, it would compromise your exclusivity, along with the revenue that that item brings into your business. Your business would be damaged in real, financial terms, but how much and for how long? If a judge views your rationale as valid, your agreement is likely to be upheld. On the other hand, if a judge sees your agreement as punishing or an attempt to hamstring your staff from eventually working anywhere else, your agreement is likely toast. Another rule of thumb: Make your non-compete simple, brief and clear.

The National Federation of Independent Business also weighs in on what business owners should consider when they’re creating a non-compete agreement for their business:

    • Is all of it reasonable? A court can even strike down individual sections they disagree with.

 

    • Are geographic limitations realistic? You may want to prohibit employees from working in Sri Lanka, but really? Reasonable is the litmus test here, too.

 

    • What about the duration of the limitations? Again, this isn’t intended to be punishment for leaving.

 

    • Have you used language strategically? Experts say it’s not wrong or illegal to use persuasive language that may cause employees to comply, regardless of the law.

 

    • Has a legal expert vetted it? Every agreement needs to be customized. There is no one-size-fits-all non-compete.



Image courtesy of Frame Angel / FreeDigitalPhotos.net

Have you had a non-compete agreement created to use in your business? What prompted you to do it? Has it been effective?


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