Non-Compete Agreements: What Entrepreneurs Should Know

There are many misconceptions about non-compete agreements. And regardless if you are starting a freelance business or startup, or if you are hiring a new employee and want them to sign a non-compete agreement, this post is for you. (Click here to learn about non-solicitation agreements.)

What is a non-compete agreement?

A non-compete agreement is just that–an agreement that says an employee cannot compete with the employer. Although many entrepreneurs think non-competes are not enforceable, that is usually incorrect. In fact, most states will enforce non-compete agreements between employers and employees, including Kansas and Missouri. (The most notable state that generally does not enforce employment non-competes is California.)

However, keep in mind that courts are not likely to enforce an unreasonable non-compete agreement that doesn’t actually protect a legitimate business interest.

Limitations

Although each state is different, a general rule is to keep your non-compete agreements limited in geographic scope and time. For example, it’s usually a good idea to keep the time restriction short–somewhere between six months to two years. And when possible, it is often smart to limit the restrictions to 50-100 miles from your primary office location. Of course, with so many businesses operating virtually, that can be tricky. If you operate nationwide, it is often best to limit the non-compete to areas where your employee actually served customers, or think about limiting the non-compete by limiting what it means to “compete” (for example, a nation-wide accounting firm with a focus on non-profits might permit an employee to compete in the accounting industry provided they don’t focus primarily on non-profit clients).

Practical Tips

A non-compete is kind of one part of a three-part process to protect your business. In addition to (or in place of) the non-compete, you should consider non-solicitation agreements and non-disclosure agreements.

You can sign a stand-alone non-compete agreement, or the non-compete agreement can simply be placed into a larger agreement (like an employment agreement, or non-disclosure agreement, or something similar). The key is to make sure the agreement is obvious and signed by the employee.

Personal Opinion

While we’re on the topic, I’d like to include my own personal opinion. Generally speaking, non-compete agreements can have very negative effects on local economies. They limit labor mobility and can drive down wages. They can also cause highly talented people to move away from communities that enforce them in favor of communities (like California) that don’t. That’s why we don’t encourage non-compete agreements in every situation. Sometimes they are needed, sometimes they are not. However, we do support non-solicitation of clients in most circumstances.

(This article is general in nature and is not legal advice.)