Whether you’re working as a freelancer, subcontractor, or running a small business, a contract can be crucial whenever you are starting on a new job to legally protect either party should anything go wrong.
Non-compete agreements are highly common in employment agreements, where it’s estimated that one in every five American workers — or 30 million — is bound by them.
If you’re running a small business or work with subcontractors, you’ve probably considered including a non-compete agreement in any subcontractor agreement you enter into, as it can protect you from having said subcontractor undercutting you and working directly with your client.
However, non-compete agreements aren’t without their share of controversy, and when you come across them as a new employee, you’ll need to know just what you’re getting yourself into.
Depending on their scope, signing a non-compete agreement without considering its full implications can create serious problems for you, particularly if you’re working as a freelancer with plans of having several different clients in one specific industry.
In this article, we’ll look at just what you need to know about non-compete agreements and what to watch out for when entering into one.
- What Is a Non-Compete Agreement?
- What to Look Out for When Signing a Non-Compete Agreement
- Do I Have to Sign a Non-Compete Agreement?
- Can I Negotiate for Better Terms in a Non-Compete Agreement?
- How to Get out of a Non-Compete Agreement
- Are There Alternatives to Non-Compete Agreements?
- Remember to Protect Yourself Legally
What Is a Non-Compete Agreement?
A non-compete agreement, sometimes called a non-competition agreement or restrictive covenant, is an employment contract to prevent an employee from either starting, or being involved in a competing business. Bear in mind that employers must have a legitimate interest in binding you to a non-compete agreement. This isn’t simply a case of not wanting you to work for a competitor.
Non-compete clauses are usually included to protect an employer’s business, since employees may gain sensitive information (such as client lists), knowledge, and skills during the course of employment that could threaten the employer’s business if they were made known to a direct competitor.
Non-compete agreements are usually restricted by a specific geographic area or period of time. Be aware that depending on the level and definition of “trade secrets” shared though, non-compete agreements may also apply for an indefinite time period.
What to Look Out for When Signing a Non-Compete Agreement
As earlier mentioned, non-compete agreements are designed to help employers retain their competitive advantage and protect legitimate business interests. If you do decide to sign a non-compete agreement, there are three things you’ll need to look out for:
1. Geographic Scope
Rarely do non-compete agreements cover the entire United States. So have a look at the geographical area in which you’re not allowed to conduct business and decide if it will work for you. Bear in mind that you’ll generally be able to work in a geographic area where the employer does not conduct any business.
2. Length of Time
Consider how long after you’ve concluded business with your client that the non-compete agreement will remain valid. Will you be able to find other jobs in the meantime that won’t breach your non-compete agreement? Typically, most non-compete agreement will last for one to two years, and some states don’t allow for anything longer than five years.
As a freelancer, you should take the length of time stipulated into serious consideration when signing such agreements, since you could end up having problems working for a new company even after your gig with a former employer has ended, especially if you have skills that are in high demand in a particular industry. A non-compete agreement valid over a long period of time could limit the type of new work you could take on and even your ability to continue working as a freelancer.
3. Business Restrictions
Some non-compete agreements can be very specific with the type of activity that constitutes a breach. Will you be prevented only from working for specific companies or will you be barred from working in a particular sector? Does self-employment constitute a breach?
At the same time, however, the restrictions should not cause you undue hardship and should be reasonable. What that actually means, however, can differ from state to state.
If you’re ever in doubt when asked to sign a non-compete agreement, you should always seek the legal advice of an employment attorney.
Do I Have to Sign a Non-Compete Agreement?
Signing a non-compete agreement isn’t mandatory. However, in a worst case scenario, if you’re asked to sign one but refuse to, you won’t be chosen for or given the job. Any chance of continued employment may also be at stake if your current employer decides to introduce a non-compete agreement and you refuse to agree to it.
That being said, however, the consequences of refusing to sign a non-compete agreement do differ depending on state laws. For example, the states of California, North Dakota, and Oklahoma don’t even allow non-compete agreements for employees.
In the state of Florida, however, non-compete agreements are so commonly used that it’s pretty much become an industry of its own. Law firms have sprung up focusing purely on representing employees and employers for disputes over non-compete agreements.
Can I Negotiate for Better Terms in a Non-Compete Agreement?
Yes. The terms of what you’d want to negotiate on will depend on what’s important to you and how flexible your client is.
For some, you could open the discussions surrounding the geographic scope, length of time, or business restrictions of the agreement.
For others, you may be able to negotiate for additional benefits or compensation (also called “consideration”) for signing a non-compete agreement. The benefit could come either in monetary or non-monetary form, such as a change in job duties or responsibilities.
Depending on the state however, offering benefits in exchange for a signature may not actually be mandatory and could merely be a nice-to-have feature.
How to Get out of a Non-Compete Agreement
Before you actually hire a lawyer, consider setting up a meeting with the business you’ve made a non-compete agreement with. Outline any future plans you have that you think may be in violation of your non-compete agreement. If you’re lucky, the business may decide to modify the agreement to suit your needs, or make null and void the agreement you had already signed.
If you’re unable to come up with an amicable agreement with your former employer or client, seek some legal advice. An employment lawyer will be able to tell you if your non-compete agreement is applicable to your current situation, and may be able to help with any negotiations. Be sure to let your new employer or client know that you have a non-compete agreement in place and are seeking legal aid.
You’ll need to be prudent about starting employment with a competitor while still bound by a non-compete agreement. Some employers will be more than willing to file a lawsuit against you (and potentially your new employer) for violating the terms of the agreement, and the cost for defending your case can very quickly become unaffordable.
Remember, in some states, you don’t automatically get out of a non-compete agreement just because you’ve been fired from your job either. Of course, if the reason for your departure from the company is because the business had engaged in illegal activity of some form, most courts will rule that the non-compete agreement is no longer enforceable.
Are There Alternatives to Non-Compete Agreements?
Non-compete agreements aren’t the only type of contracts that protects a business from competition. This means even if your state doesn’t allow for non-compete agreements, you could be bound by something very similar when starting a new job. Two of the more common ones are:
This protects any type of confidential information that may be revealed to the employee during the course of employment. Non-disclosure agreements restrict a person from sharing the particular information with anybody else.
This prevents you from soliciting customers of the business, essentially protecting the company’s client list, for the term of your employment (and potentially for some time after as well).
Remember to Protect Yourself Legally
In the event that you’re asked to sign a non-compete agreement, take the time to seriously consider the restrictions and determine if it’ll be of any detrimental impact on your career.
Rules surrounding what can be included in a non-compete agreement and how they are enforced by a company can differ greatly from state to state so it’s vital you seek legal advice if you’re ever doubt of what you’re being asked to agree to.