In a recent blog post, we talked about some compliance concerns that arise when developing an employee handbook. Specifically, we discussed the importance of making a disclaimer that the employee handbook is not a contract, and that employees are employed at-will, meaning that an employee can be terminated or can quit at any time without reason, explanation, or warning. Including this disclaimer and getting a signature from the employee signifying that they understand is a way for employers to protect themselves from getting in hot water should an employee try to claim that the employer broke a binding employment contract by terminating them.
Another section that employers sometimes include in employee handbooks that can pose compliance challenges is the section containing non-compete and non-disclosure agreements. Non-compete and non-disclosure agreements are two separate things, but both of them are legal instruments used by employers to limit what an employee can say or do in certain scenarios, and both are used as tools to protect the company from competitors. In this post, we will explain both non-compete and non-disclosure agreements and discuss why and how they should be used, as well as the compliance challenges that they can create.
A non-compete agreement is an agreement between an employer and employee that prohibits the employee from working for a direct competitor for a set period of time after leaving the company. The idea behind the non-compete agreement is that it will prevent employees from gaining insider company knowledge while employed by the company and then leaving to work for a competing company and sharing that knowledge with the new company.
In order to be considered valid, a non-compete agreement must tick several boxes.
- It must be seen as protecting a legitimate business interest of the employer. This means that the non-compete agreement should not be in place as a means of punishing an employee for leaving the company. Rather, there should be confidential business information, such as a trade secret, that the employer is aiming to protect with the non-compete agreement. This information should be vital to the business, meaning it would be detrimental if said information was available to competitors.
- It must be mutually beneficial. A standard tenet of contracts is that both sides must get something out of the contract for it to be valid. The benefit for the employer is the benefit of having vital company information protected. For the employee, the benefit is usually the job itself. (This makes a non-compete agreement with a pre-existing employee tricky).
- It must have reasonable constraints. A noncompete should not overstretch its bounds of duration and scope. Each case will be different, but in general, the length of the non-compete should not outlast the time for which the vital information has value, and most enforceable non-competes range from six months to two years after employment ends. In addition, the non-compete should not cover too broad of a geographic area, or prevent the employee from seeking employment in an unrelated field.
In some states, like California, non-compete agreements are not enforceable at all, because they are considered to be stifling to innovation. In other states, they are very difficult to enforce. Each state has varying guidelines for enforcing non-compete agreements, so employers should take the time to get familiar with the approach in their state.
With this being considered, many employers may find themselves asking “Is it worth it to require my employees to sign a non-compete agreement?”
The obvious benefits are protecting vital business information and lessening the threat of competition. The drawback, beyond the difficulty in enforcing these agreements, is that non-compete agreements can make an employer or a job opportunity less appealing to potential employees. Thus, employers who are thinking about creating a non-compete agreement must ask themselves if they are really trying to protect the business, or if the agreement could just be preventing employees from seeking employment elsewhere, and potentially advancing in their careers.
A non-disclosure agreement (NDA) is similar to a non-compete agreement in that it seeks to protect vital business information. A non-disclosure agreement does not go as far as prohibiting an employee to seek employment at a competitor firm, but it does prevent employees from disclosing vital business information that they obtained during the course of their employment with the company. This may seem to be less effective than a non-compete agreement, but it still prevents employees from using the vital business information as a recruiting incentive for competing companies to hire them. In addition, non-disclosure agreements are subject to far less scrutiny in the courts, and thus are much easier to enforce than non-compete agreements.
There are a handful of situations in which a nondisclosure agreement makes sense, including the hiring of a new employee who will have access to proprietary information, the establishment of a new joint venture, and a presentation to a potential investor or partner. Still, just like with non-compete agreements, employers should put careful consideration into their reasoning for drawing up a non-disclosure agreement.
In conclusion, both non-compete agreements and non-disclosure agreements can be very useful tools in protecting the information and overall interests of a business, but they can pose compliance risks and are not always easily enforced. Employers considering creating either should take careful consideration in the process, and should not hesitate to consult with outside help, such as an employment law attorney. Do you want to learn more about how Navigate can help to take the reigns with concerns like this and other administrative necessities that detract from the growth of your business? Click here to set up a free consultation.
This post is part of a series on employee handbooks and includes information on employee non disclosure agreements. Check out the other posts in the series: