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Introduction to Non-Compete Contract Agreements
In the past, there has been fierce debate over whether a non-compete contract agreement infringed on an employee's right to earn a living . Thankfully, the U.S. Court system has decided to step in and make certain legal mandates for the use of this contract. Therefore, when composing a non-compete contract agreement of your own, it is important that you know what should be included in the document, as well as justifiable reasons to support your use of the arrangement. Let's face it, the last thing your business needs to be accused of is violating another individual's right to compete in a legal trade.
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Basic Overview: Non-Compete Contract Agreements
A non-compete contract agreement (also known as covenant not to compete (CNC)) is a document commonly used by employers who would like to protect themselves from former employees that have the opportunity to leak sensitive information to their competitors. Many times, this document will place a temporary hold on period of time in which an employee is banned from working with its competitors. The rationale behind this thinking is that an employee has an unfair opportunity to work for a competing company, or can start their own business with the knowledge and confidential information of their former employer. Therefore, the former employee has the competitive advantage to take the company's sensitive business practices, confidential information, and/or privacy trade secrets and use this information unfavorably against them.
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Common Disadvantages to a CNC
Unfortunately, this document has not always worked the way it was intended, due to misuse and abuse by some businesses. That is, the covenant not to compete contract was used as a spiteful tool to prevent employees from working elsewhere in the same industry. Due to such problems, CNCs have been legally examined by U.S. Courts because of the illegal abuse of this contract.
To date, the U.S. courts have concluded that the contract is legal only if it places reasonable limits and reasonable geographical restrictions on a former employee. Therefore, the courts have taken the position that an employer does not have the right to completely ban an employee from working in a trade that (s)he is adequately experienced and trained in doing.
Note: California is one of the only states that has made a non-compete contract agreement unjustifiable. This contract is only deemed justifiable as it pertains to a narrow scope of situations such as stakeholder and sale of business activities. According to California Section Code 16600 it specifically states “...every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
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What are Justifiable and Legal Uses of the Document?
Due to the sensitivity of this subject, U.S. Court system has provided some legal rules to follow in order to justify the use of CNCs. If you are planning to use a CNC in your normal course of hiring procedures, make sure you can substantiate the following (Applicable to all states, except for California):
- Provide proof that a non-compete agreement contract is necessary in order to protect legitimate business interest and operations.
- The restriction on the employee's right to compete is no greater than any restrictions that should be placed on the employer's right to protect its legitimate business interest.
- The non-compete agreement contract has to be supported by consideration that the employee received something in exchange for it.
Before drafting your own non-compete contract, please refer to the free non-compete contract samples provided in this article. (Free non-compete contract samples was obtained from free samples provided by the University of Minnesota. Please click on the image to enlarge.)
Light Heads Shaking Hands: freedigitalphotos.net/Salvatore Vuono
White Blocks Shaking Hands: freedigitalphotos.net/Francesco Marino
Businessman in a bubble: freedigitalphotos.net/graur razvan ionut