Generally by signing a covenant not to compete, an employee agrees that if she leaves the employer, she will not go to work for the employer’s direct competitors. The employee will sometimes receive compensation for signing the agreement. Covenants not to compete are also known as "non-compete clauses."
Businesses that typically use Covenants not to Compete include those dealing with:
- Highly confidential materials
- Client demographic/information databases which an employee can access
- Businesses with a direct competitor
- Trade secrets
- Trademarks and copyrights
Typical Restrictions in a Covenant not to Compete agreement may relate to:
- Time – After the employee leaves the former employer, the employee must refrain from working for the competitor for a certain period of time
- Type of business – Working in certain industries and businesses, related to that of the employer, may be prohibited
- Location – The employee may not be able to work for a competitor within a specified geographic location
It is difficult to determine whether a judge will enforce a non-competition agreement. While the secrets of an employer are valuable, the legal system also places value on an individual’s freedom to pursue other employment. To be enforceable Courts usually require that a covenant not to compete be reasonable.
A convent not to compete will be considered unreasonable (i.e. not enforceable) when:
- It lasts for too long. Depending on the trade of the employer, a court will determine how much time is appropriate.
- The geographic area it covers is too large.
- The types of business it covers are too far-reaching. The covenant usually prohibits employment in companies related to the employer’s industry.
- The employer does not have a legitimate business interest in enforcing the covenant not to compete.
Before signing anything that may restrict your future employment access, it is wise to have an attorney review the document. An attorney can also help draft a covenant not to compete, or negotiate the terms of such a covenant. An experienced business lawyer can advise you on whether you can sue an employee for breaching a covenant not to compete, or whether you can go work for a competitor.