Courts are responsible for determining whether non-compete and non-disclosure agreements are enforceable. This is because employee mobility is high with employees seeking different opportunities and consequently, employers seeking security.
In terms of employment, non-compete and non-disclosure agreements are legal instruments that restrict the actions of an employee. These restrictive covenants essentially protect the well-being of a company. For example, former employees may be unable to reveal certain information about the company. Perhaps employers want to ensure that the employee doesn’t compete with their company after leaving. As a result, businesses can avoid significant reputation and financial damage.
To understand what non-compete and non-disclosure agreements are as well as their importance, keep reading! As a business owner, you may begin to understand the value they can bring and when to use each kind.
Non-compete agreements are generally used to prohibit former employees from directly competing against the employer after employment is terminated. In most cases, non-competition entails that the employee cannot work for an employer who competes in the same industry or start their own business that competes in the same industry. As a result, this protects the company’s customer base, reputation, and goodwill.
Every non-compete agreement will contain a geographic area and time period in which it is valid. But, where things get a bit complicated is when the question of whether the agreement is in restraint of trade arises. This happens when an employee argues that his/her freedom to apply his/her skills and expertise is being limited. As a result, courts will most likely deem a non-compete agreement unenforceable. However, if an employer can prove that the following points are in play, the courts can hold the non-compete agreement enforceable:
- Company has a legitimate proprietary interest that deserves protection;
- The geographic area and time period of the agreement are reasonable; and
- The agreement isn’t otherwise against public interest.
Non-disclosure agreements restrict the employee from sharing any important or sensitive information pertaining to the company. This is important for companies because it allows them to keep vital information confidential that can otherwise be used against them by competitors. Essentially, not signing a non-disclosure agreement puts a company’s market position and competitive advantage is at risk .
There are 2 main types of non-disclosure agreements:
- Unilateral. Only one party cannot reveal information.
- Mutual. Both parties cannot information to those outside the contract. These are less common but generally used when companies are exploring a potential relationship such as a partnership, merger, etc.
Now, as you may have realized, there’s a fine line between protecting the welfare of a business and the rights of employees seeking new opportunities. Therefore, if you are asked to sign or want someone to sign a non-compete or non-disclosure agreement, you’ll want to make sure that your document is legally sound. At Sodagar & Co., we are happy to help you understand these restrictive covenants, draft them, or consult with you on the laws and guidelines. We want to help you avoid future disputes.