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Rethinking Non-Compete Agreements: Advice for Small Businesses

Rethinking Non-Compete Agreements: Advice for Small Businesses

(Note: This post was initially published on LinkedIn, and the following iteration is a syndicated and updated version of the same.) 

Non-compete provisions are typically incorporated into employment agreements and prevent employees from working for competitor companies after their current employment ends. These provisions restrict worker’s subsequent employment by time, industry and/or location.

Types of Non-Compete Restrictions: Time, Industry, Location, & Entrepreneurship

A time restriction prevents someone from working for a competitor for a defined period after leaving an employer. An industry restriction prevents someone from working for a particular type of industry that competes with the employer. And a location restriction prevents someone from working in a particular region.

A fourth type of restriction may even prevent an employee from starting his or her own business that might compete with a former employer.

Evolution of Non-Compete Usage: From Large Corporations to Small Businesses

Non-compete provisions were created to protect an employer’s confidential information, such as trade secrets, IP, client lists, and revenue. They were generally enforced by large companies against specialized, highly paid employees.

Today, however, non-competes have become increasingly more common in smaller businesses, irrespective of specialized skills or the size of a paycheck.

Debates Surrounding Non-Compete Provisions

We take no position regarding non-competition agreements, since an employer may exercise its discretion to include, or delete it, from an employment contract. Our customers have suggested reasons for the choice in their contract templates and playbooks. It goes something like this:

On one hand, companies want to hold onto workers and may genuinely believe a non-compete dissuades employees from leaving. On the other hand, a non-compete may prompt potential workers from even joining companies.

Despite the arguments on both sides, anecdotal evidence from our customers suggests that smaller businesses are moving away from non-competes. We hear things like:

Non-competes are a barrier to people who want to be entrepreneurial and start their own small businesses…They prevent smaller businesses from hiring a diverse, experienced, and skilled staff…They can be weaponized to make employees feel like hostages…They can impose psychological harm on employees…Federal and state laws adequately address employee mobility, so there’s no reason for my company to impose it by contract.

Non-compete agreements are only one type of provision in an employment contract that restricts employees.

Seeking Guidance for Employment Contract Development

In a previous post, we discussed non-disclosure agreements, but there are also agreements regarding non-solicitation, non-disparagement, and mandatory arbitration.

Again, each employment relationship stands alone, and we do not offer a legal opinion as to the preferred position regarding restrictive covenants.

What we can say is that the decision of whether to impose a non-compete or other employment restriction is not a copy-and-paste exercise.

We work with small and medium-sized businesses to create templates and playbooks for employment agreements, including whether to include such restrictive provisions. Feel free to reach out to us, today!

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