A noncompete agreement is essential for business owners who want to ensure an employee’s skills and knowledge may not be used to directly compete with your business. Though this might sound straightforward enough, there are some important factors to keep in mind to make sure that your noncompete agreement will be effective and legally sound.
What constitutes a noncompete agreement?
A noncompete agreement might be useful for businesses with legitimate, protectable business interests, such as trade secrets, customer lists, or other proprietary business information, that when revealed to a competitor could cause serious monetary injuries for the business. The legal enforcement of noncompete agreements varies from state to state, sometimes making it difficult to tell what your agreement needs to include to be enforceable.
Many states, including Pennsylvania, view noncompete agreements as an inhibitor of free trade and a restrictor of employee autonomy. While case law is constantly evolving, the courts have generally established the requirements for a valid noncompete agreement.
In order for your noncomplete agreement to be enforced by Pennsylvania courts, it must:
- Be justifiably necessary on the part of the business to protect a legitimate, business interest.
- Be reasonable in geographic reach and length of time. For example, an agreement might be limited to a certain mile radius and last for two years, depending on the position it is created for.
- Be signed when the employee first accepts his or her position, in the case of new employees. This signature may not be buried in the pages of an employee manual or other blanket document. The employee must specifically agree to the noncompete agreement itself with the full knowledge that he or she is doing so in consideration of the offer of employment.
- Or, it must include some kind of consideration on the part of the employee. For new employees, the offer of employment is consideration in and of itself. For existing employees, however, some concession must be made in exchange for their signing the noncompete agreement, including anything from a bonus to a promotion that reasonably compensates the employee for the rights they are foregoing by signing the agreement.
How to make noncompete agreements work for your business
Now that you know exactly what a noncompete agreement entails, it’s time to assess what instituting a noncompete agreement might look like for your business. Remember, agreements like this aren’t for everyone, and they certainly aren’t one-size-fits-all.
If you feel that your business has legitimate, protectable interests and might benefit from a noncompete agreement, here are some factors to think about when generating your first draft.
- Does the nature of this employee’s work create the need for a noncompete agreement? Though certain employees may be privy to information or skills you’d like to keep from your competition, likely not all of your employees will be.
- What geographic region will your agreement cover? Here, it is paramount to weigh both your business’s scope and your employee’s ability to find other employment. Where are they working now? How does that compare with your business’s sphere of influence, versus your competitor’s?
- What length of time will best suit your noncompete agreement? The Pennsylvania courts have upheld one-year and two-year agreement, stating in those cases that this duration does not harm the employee’s chances of future skilled career success. The less time restricted the agreement is, the more likely a court will uphold it as reasonable.
Consulting with an attorney can help you craft an enforceable noncompete agreement that’s customized for your business and your employees. Contact Stock and Leader’s Business & Employment team today to learn more.