A non-compete agreement (NCA) is a binding contract that helps employers protect their business. They are so popular than an estimated 36 million to 60 million private sector workers are subject to some form of NCA. It’s easy to see why NCAs are so attractive to businesses. They forbid employees from sharing proprietary information, working with competitors, or starting a competing business. While they may seem appealing to business owners, NCAs are not without criticism. In some cases, they’ve been thrown out of court for being too restrictive on workers’ rights. If you’re considering using an NCA, here are many factors to consider.
Non-Compete Contracts Overview
Compete, is a contract signed by employees in order to keep company information private. In addition to preventing employees from working with competitors, NCAs may also prohibit them from revealing company secrets to businesses in the same industry. The agreement often includes restrictions on sharing trade secrets, customer lists, or intellectual property.
NCAs must include specific terms in order to be enforceable. You must make sure your NCA doesn’t go too far in restricting an employee’s ability to find work. If you want your NCA to be able to stand up in court, you should pay attention to these three key areas:
- Time. In general, longer agreements make it less likely for NCAs to be enforceable in court. There’s no magic number for the term length, but many NCAs last for a period between six months and a year. Those lasting a few years or longer have less of a chance of holding up in court.
- Geography. NCAs should provide a reasonable restriction on working with competitors in your region. The size of the geographic restrictions in your NCA will depend on your industry. However, courts are more willing to accept more localized limits.
- Scope. NCAs with broad terms aren’t likely to win in court. Since they restrict an employee’s ability to find work, it’s crucial to clearly define your competitors in your NCA. You should name the field of industry that applies. In some cases, you can even benefit from naming your specific competitors.
When to Create a Non-Compete Agreement
Businesses may create NCAs for a number of reasons. While the motivations for creating an NCA vary from business to business, there are several key benefits to consider. For one, NCAs prevent employees from sharing proprietary information. They can be useful if you’re worried about company details becoming public knowledge — such as trade secrets, business processes, and client information. Employees are often privy to these secrets and it’s critical to maintain that secrecy should they ever walk out the door. An NCA prevents them from giving this confidential information to competitors.
NCAs are also useful during acquisitions. If you’re buying a business, you can use an NCA to prevent the seller from starting a competing business. On the flip side, NCAs can make your business appear valuable should you ever decide to sell. They can inspire confidence in potential buyers and ease their concerns about disgruntled employees choosing to work with competitors. NCAs can be a huge selling point for clients and customers since clients often entrust companies with their business secrets. Having NCAs on the books can give your clients peace of mind that their confidential information is safe. It’s easy to see the appeal of NCAs for business owners. But what about for workers? It’s important for business owners to consider the employee’s perspective before creating an NCA. There’s no denying that NCAs are a complicated issue for workers. Many argue that they limit the employee’s ability to find future employment. As a business owner, you have to consider that some potential employees are less likely to work with you should you require them to sign an NCA. While this certainly shouldn’t be the only factor you consider, it’s important to weigh the pros and cons before you establish NCAs for your business.
Florida Laws on Non-Compete Agreements
Though many businesses routinely use NCAs, they are not always a viable option. Some states have laws prohibiting the enforcement of NCAs. California, North Dakota, and Oklahoma forbid the use of NCAs. California has especially restrictive NCA laws. In California, employees can sue employers who require workers to sign NCAs. Contrarily, nearly half of all states allow employers to prevent laid-off workers from competing in the same industry for a year or more.
What are the NCA laws here in Florida? Florida has a complicated history with NCAs, and the legislature has rewritten provisions several times. Up until 1996, NCAs were seen as too restrictive under Florida common law. Florida’s current noncompete statute states that noncompete agreements are not prohibited “so long as such contracts are reasonable in time, area, and line of business.” The current Florida statute also limits NCAs to five key items: trade secrets, goodwill, relationships with customers, confidential information, and specialized training. To enforce an NCA, you must be able to prove it is necessary to protect legitimate business interests.
Non-Compete Agreement Items to Consider
For a non-compete agreement to be enforceable, you must also include the following items:
- The names and contact information for all parties.
- The date and duration of the agreement.
- The geographic location covered in the agreement.
- The compensation, known as the consideration, for signing. This can be a salary for a new employee or a lump sum for an employee leaving the company.
- Specifics about prohibited activities and information covered by the agreement.
- A description of the interests being protected by the agreement.
- The penalties for violating the agreement.
Many NCAs are thrown out of court because they weren’t set up correctly in the first place. Avoid putting in too many restrictions and clearly define the scope, time, and region covered in your agreement to set yourself up for success. Our business attorneys can guide you through the practical and legal obligations of establishing an NCA. Contact us today to get started.