Caveats Before Signing a Non-Compete

A non-compete agreement is a legal clause, addendum, or separate employment contract that bars employees from working for, doing business with, or starting a competing business for a specified period of time. These agreements also prohibit employees from sharing proprietary information with anyone else during or after they leave the company.

Once commonly used only in the corporate world and certain industries, such as broadcasting and technology, it isn't unheard of for small businesses to use non-competes, too. In fact, more businesses now require non-competes from their employees, including yoga instructors, camp counselors, and even interns.

That's why it's important to pay attention to the growing pressure on employees to sign, whether you're a new employee or if your employer comes to you with a new form when you get a raise or promotion. This article highlights some of the key points of non-competes and some of the main factors you should consider before you sign on the dotted line.

Job Offer Paired With Non-Compete

Don't sign and accept the non-compete agreement on the spot—though chances are you will be tempted. Ask for a copy of the agreement to review while you think about the job offer and your starting date. You'll probably feel some pressure, but try to resist it.

Most job candidates don't have the bargaining power when it comes to non-competes. Any resistance that a potential new hire has to a contract or non-compete clause may put up a red flag for the company. So instead of saying no, try offering an informed and reasonable approach.

"Which is why we talk the candidate through it," says Bryan Crigler, president of Winona Title Group. "We have legal support to review and evaluate the document and advise on particular situations." Often you can get a custom-tailored contract that works better for you.

Do You Need a Lawyer?

Not necessarily. If you feel you understand what’s at issue and are not confused by the wording of the document itself, and the contract seems fairly balanced, you may decide to sign on the line and hope for no problem.

Read the tips below before you accept any offer, and be sure to keep a copy of whatever you sign, because you may need it. For instance, you may need a copy if consider changing jobs, or if the company that hired you is merged into another firm. And chances are, you'll probably need a copy if you are ever laid off.

Covenants Not to Compete

A non-compete contract or a covenant not to compete is governed by state rather than federal laws. This kind of contract generally covers three aspects:

1. A traditional non-compete, which prohibits the employee from joining competing businesses identified either by name or description during a specified period of time and within a defined geographical area.
2. A non-solicitation agreement. This bars the employee from approaching customers, poaching employees, and/or wooing suppliers of the former employer.
3. Confidentiality agreements or non-disclosures. This aspect prohibits using or revealing information the former employer wants to keep private, which may be product formulations, client lists, marketing plans, or some other proprietary information.

It's clear that what employers are worried about is protecting their businesses. But a non-compete may go too far in what it bans. Generally, a court's view of what is reasonable will rest on these five points:

1. Potential harm to the employer. The employer has to establish this, not you.
2. A specified time period. In the eyes of the court, three to six months for a yoga instructor might be reasonable, but as many as two or even five years could be seen as appropriate for a key executive.
3. Prohibited territory. Up to 10 miles away might be fine for a hair salon, but a three-state area could be acceptable for a sales manager.
4. Impact on the employee. Will it deprive the employee of making a living or force a relocation in order to use their experience and skills? Some state courts weigh this point more heavily than others. An outlier to this is Florida law, which prohibits even considering it in deciding non-compete cases.
5. Interests of the general public. A covenant that severely stifles competition to the point of creating a monopoly might not be acceptable.

Courts do not honor provisions they deem unreasonable. This is a point you may make in negotiation. There is, however, a wide variation from state to state and even in what individual courtrooms enforce, so unless you have expert advice, it's safer not to expect this to protect you.

Negotiating Your Contract

Focus on what you want to accomplish. If the employer is a local small business and you speak with the owner, ask about the origin of the non-compete document. Did a lawyer prepare it for the business or was it downloaded? If it's a one-size-fits-all online form, discuss it point by point in the spirit of working out an agreement to your mutual benefit and eliminating excess baggage. To do that, of course, both parties have to know what their benefits or disadvantages are.

Suggest that you sign a non-disclosure agreement but without the geographic limitation. Or you might argue to shorten the time period by pointing out that with your student loans, you can't afford to be out of work for six months, but a six- to eight-week period seems fair. Try to add a sentence saying that if you are laid off through no fault of your own, the agreement no longer applies.

Contracts work in two ways by binding both parties. Ask for assurance in the document that as you gain experience with the company, you will be considered for raises and promotions, so that you are not stuck at your entry-level salary, trapped by a non-compete. Do not be reluctant to stick to plain language rather than legal-sounding terms you may not understand.

If the employer is a large corporation, chances are the document was prepared by a big-time legal department. Don't let this bog you down because you can still make your case to the human resources officer or company lawyer. And remember, it helps in any negotiation to know at what point you are willing to walk away from the deal.

Another time to consult an attorney: If you're asked to sign a non-compete as a condition of getting severance when you're being terminated. In fact, it's useful to get legal advice before signing anything during a layoff or termination.

The situation becomes even more delicate if the non-compete shows up when you're being offered a raise or promotion. Some states require that you receive something extra, such as additional vacation time, if you're asked to sign such a clause when you're already an employee of a company. In that situation, it's worth taking the papers home and consulting an attorney before you sign.