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Pros and Cons of Non-Compete Agreements

Whether you are starting a new business or growing an existing business, protecting the future prosperity of your company is of paramount importance. From entity formation to drafting vendor contracts, there are many tools you can utilize to avoid unnecessary risk to the success of your enterprise. As an employer, one of the tools you can utilize is a non-solicitation or non-compete agreement for key employees.

Why Should You Consider A Non-Compete Agreement?
An organization’s greatest asset is its employees. An employee develops knowledge and skills during his or her time with your company and may be difficult to replace. As a company, you not only lose the performance of the key employee, but you also stand to have the employee working for a competitor! For example, a top salesman of your company has intimate knowledge of your company’s product or service including proprietary product information, pricing, discounts, customer lists, or trade secrets. If this salesman decides to leave your company for a direct competitor, you will immediately be at a disadvantage. What options do you have as an employer? An option available to every private employer is to have key employees sign a non-compete agreement, non-solicitation agreement or both.

How Can They Be Enforced?
As a brief overview, Pennsylvania courts may enforce a non-solicitation or non-compete agreement if it meets the following criteria:

  • The agreement is incident to the employment relationship;
  • The employer provides adequate “consideration” in exchange for the non-compete agreement (a bonus, promotion or even the job itself if the agreement is signed at the time of hire);
  • The restriction is necessary to protect the legitimate business interests of the employer; and
  • The restrictions are reasonably limited in time and geographic scope.

When Should You Have Them Signed?
Try to have a new key employee sign a non-compete agreement or non-solicitation agreement at the time of hire. By doing so, you will avoid having to pay additional “consideration” such as bonus to the employee. (Pennsylvania courts will not enforce a non-compete agreement or non-solicitation agreement where it is found that a current employee did not receive additional consideration in exchange for the agreement not to compete).

What’s the Difference Between the Two?
The big difference between the non-compete agreement and the non-solicitation provision is scope. Non-compete agreements generally prohibit an employee from directly or indirectly “competing” against your company. That is, the employee is not free to work for a competitor during the time set in the non-compete agreement and cannot work for a competitor in a particular geographic region during the restrictive period. The non-solicitation provision is typically narrower in that it does not prohibit an employee from working for a competitor. Rather, a non-solicitation provision typically forbids an employee from soliciting the company’s customers or other employees for a set period of time after the employee leaves.

Will They Protect My Company in the Future?
Pennsylvania courts disfavor restraints on free trade—such as restricting an employee’s ability to earn a living with a non-compete agreement. However, a well-drafted non-compete and/or non-solicitation agreement will be enforced by a court if certain conditions are met. It is crucial that you take the time to carefully consider the needs of your business when you consider the use of a non-compete or non-solicitation agreement. Whether you prepare an enforceable restriction will depend greatly on your industry and your legitimate business needs. Seek the advice of legal counsel when drafting any non-compete or non-solicitation to ensure the agreement is enforceable.

Want to learn more?  Contact Stock and Leader’s Employment Law Group.

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