Should we ask all new employees to sign noncompete agreements?

Question:

Make sure your company can enforce its noncompete agreements.

My company is revising its paperwork for new employees, and we are considering asking new hires to sign noncompete agreements. What are the legal pros and cons of noncompetes? 

Answer:

In a typical noncompete agreement, an employee agrees not to go work for a direct competitor of your company -- or to start a competing business of his or her own -- for a specified time after leaving your company. A noncompete makes it easier for your company to protect its trade secrets and confidential information. Rather than having to show that an employee had access to these secrets, revealed them to a competitor (or used them to compete), and harmed your company by doing so, your company can simply show that the employee works for a competitor. That alone is a violation of a noncompete agreement.

So that's one check for the "advantages" column. The other is that noncompete agreements make employees think twice about working for a competitor in the first place. If you explain the agreement carefully when the employee leaves your company, chances are pretty good that the employee won't want to risk legal problems by violating the agreement. In other words, noncompete agreements are not just easier to police than trade secret violations; they also are less likely to have to be enforced, because they discourage employees from competing in the first instance. 

However, there are disadvantages to using noncompete agreements as well, all of them stemming from the legal risks these contracts carry. First, noncompetes are not enforceable at all in California. Even asking a California employee to sign one is a legal violation. Second, even states that enforce noncompete agreements scrutinize them carefully. This makes good sense, if you think about it: A noncompete takes job opportunities away from an employee. If the employee has a specific skill set, a noncompete could prevent the employee from finding work in his or her field in the area where the employee lives. This is a fairly significant sacrifice. 

There are a few things your company can do to minimize the legal risks associated with noncompete agreements: 

  • Know your state's rules about noncompete agreements and follow them to the letter. 
  • Ask employees to sign a noncompete only if they will have access to your company's trade secrets -- and if losing that employee and that information to a competitor would be truly damaging to your business. Companies get in trouble when they ask everyone, from the C-suite to the secretarial pool, to sign noncompetes. 
  • Give the employee something -- like a bonus -- for signing the agreement. You're asking the employee to give up rights, and contract law requires you to provide something to the employee in return. Although courts have found that giving the employee a job (or continued employment, if the employee already works for the company) is sufficient, it's safer to provide a little something extra. 
  • Limit the agreement's scope. Noncompetes are more likely to be enforced if they are limited in time and geographical area. Also, the more narrowly you define competing businesses, the more likely you will be able to enforce the agreement. Broad restrictions on the employee's ability to earn a living have led courts to reject noncompete agreements. 

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