Non-Compete Clauses: A Handy Guide - Shegerian Law

Employees must sign a contract before they begin their first official day at the workplace. For both them and the employer, this is an essential step that provides a clear understanding of how the partnership will work.

The contract serves as a legally binding document that includes specific clauses that will help you retain your rights during and after the end of the agreement. In most cases, a non-compete clause will be included in this form.

As an employee, signing a non-compete agreement may seem like it is putting you at a disadvantage while solely helping your employer. However, when you look at the finer details, there is often more to this clause beyond the surface level. For instance, you may find that it can benefit you during employment and when you are ready to transfer to another company.

Understanding how this agreement works is essential because both parties are affected and bound by certain rules. Otherwise, the assistance of a breach of contract attorney may be required when future issues occur. 


What is a Non-Compete Clause or Agreement?

Signing a non-compete clause indicates that an employee agrees never to use the information they learned during their previous employment to start their own business and compete against the previous employer.

This applies to scenarios where an employee’s contract has been fulfilled, as they will leave the company soon. This type of agreement also ensures that employers can keep their place in the market.

Many industries include this agreement in their contracts before welcoming new employees to their teams, such as media, IT, financial services, manufacturing, and more. However, depending on what state the company is in and local jurisdiction, levels of enforcement may differ.

For example, in California, local laws do not legally recognize non-compete agreements. If an employer forces this agreement upon an employee, said employee is entitled to sue the employer and get compensation. Other states choose to adopt a certain standard to this agreement without necessarily restricting the worker’s ability to find other employment. 


Conditions That May Be Included in a Non-Compete Clause

Similar to other agreements you may find in an employment contract, non-compete clauses can have multiple specified conditions. These situations typically cover certain acts or events that affect both parties and their contractual duties towards each other and the company at large. Here are a few factors that may affect these situations. 

  • Timeframe

The contract will indicate a specific timeframe where you will agree not to create a competing business or work for a direct competitor of your employer. This factor immediately takes place once your current contract expires, and you no longer have a relationship with your former employer.

  • Location

Before an employment contract can be considered valid, it should first not be contrary to any good moral or law. However, it is important to note that all contracts are governed by the state laws of where the company is legally registered. Therefore, a non-compete clause may only be reasonable within a geographical area where it is considered fair.

  • Definition of the competitor

Employers can provide a list of direct competitors in the contract to establish clearly where a worker cannot be employed for a certain time after the end of their initial agreement. The non-compete clause can also prohibit the said employee from starting a specific business in the fields that the employer is established in.

  • Damages

Liquidated damages can be provided in a contract as a specified amount that the breaching party will pay in the event that the contract is breached. The employer may stipulate that the employee must pay if some conditions are not adhered to. However, the court may also decide if these damages are within reason before you pay for them.

  • Compensation

During the agreed period of the non-compete clause, the employer will pay the employee a compensation fee every month until the agreement expires. These reimbursements can come in multiple forms, such as additional leave credits, a promotion from your current position, bonus pay, etc.


Legalities Involved in Non-Compete Clauses

Before you even consider signing a non-compete agreement, you need to ensure that the conditions you are restricting yourself to are within reasonable limits. This is because agreeing may restrain your options for future employment. 

Apart from knowing your restrictions, you should also go through the contract carefully and examine it to see if it is within the legal bounds of the state you are in. Doing this ensures that you avoid getting into legal trouble down the line and avoid inconveniences that limit your career development. 


Important Things to Keep in Mind When Negotiating a Non-Compete Clause

If a non-compete clause is necessary for you to attain employment, keep in mind the following factors to help you gain a more favorable outcome from it.

  • It is generally not favored by the courts and goes against the employer

In most states, non-compete agreements are often seen as unnecessary as they generally restrict a person’s ability to find suitable employment after the end of their contract. Employers will have to show that these restrictions are within reasonable limits and necessary.

  • The enforceability varies from state to state

Each state may have different laws that determine if a non-compete clause can be legally enforced or not. If an employer attempts to force or compel a worker into signing an agreement in a state where it is not considered valid, legal charges can be made against the employer. 

  • An excessively prohibitive clause is often unenforceable

All restrictions within a non-compete agreement must be considered fair and reasonable according to the laws of the involved state. This ensures that the employee is protected and can still find new employment at the end of the term. 

  • Discuss the possibility of an additional benefit in exchange for signing the agreement

As part of your negotiations before signing a non-compete agreement, open the idea of improving your compensation in exchange. This can be in the form of a bonus payment, a higher position in the company, etc.

  • Don’t be afraid to seek legal advice

Legal counsel is often a necessary step that you need to take before signing a non-compete agreement. This can help you identify all problematic statements in your contract and look for ways to improve them for the benefit of all parties involved. 

  • Insist on clarifying vague contract language

Contracts that do not use clear language to explain the stated conditions are often difficult to enforce because different parties can have multiple interpretations for them 

  • Clearly define the length of time stipulated by the agreement

Contracts that do not have a clear timeframe of when your employment restriction ends should be addressed. Ensure that both parties agree on a reasonable amount of time for the worker to seek new employment at the end of their term. 

  • Geographical restrictions are generally broad but not necessarily set in stone

Companies may try to restrict employees from working in similar fields within the same state or specified areas in fear of losing them to competition. However, this aspect is generally negotiable, so workers will not need to move to another state each time they seek employment. 

  • Non-compete agreements may switch to a non-disclosure clause

In some cases, negotiating for other restrictions may be better than simply signing a non-compete agreement. This typically turns the original clause into a non-disclosure where you can still get immediate employment after your term. 


Legal Limitations and Reminders

In the corporate world, contracts are necessary documents as they ensure that both parties are in equal understanding of what their relationship dictates. This not only prevents significant misunderstandings in the future, but it is also a common way to protect both the employer and the employee. 

Non-compete clauses ensure that the employer retains its place in the market without necessarily limiting the employee’s job opportunities. However, despite the common understanding of this condition, it is still important to carefully read through your employment contract before signing on the dotted line. 

If you are in need of further assistance on employment matters, reach out to Shegerian & Associates today and inquire about our services.

Manuela Varela

Relations Manager

Manuela Varela has been with Shegerian & Associates since August 2022. She is responsible for outreach and marketing on behalf of the firm and manages relationships between firms and referring attorneys. She is also responsible for developing business opportunities and affiliations. Manuela graduated from Loyola Marymount University with a degree in Economics and Political Science.