Managing a large organisation or running a business is a complex process. To maintain the quality of your products and the happiness of your employees, you must consider several factors. Non-compete agreements are one of these factors. It can be challenging to choose between these types of contracts because they have a variety of positive and negative attributes.
Did You Know? Under section 27 of the Indian Contract Act of 1872, any agreement restricting an individual from exercising a lawful profession, business, or trade is void to that extent.
What is a Noncompete Agreement?
The non-compete agreement is a contract clause that limits an employee's ability to compete with their employer after the employment agreement ends.
Critical points of a non-compete agreement:
- Non-compete agreements guarantee that the employee will NOT compete with the organisation directly or indirectly during a specified period.
- It prohibits an employee or former employee from competing with an employer for some time after leaving.
- During employment, the employer must keep all trade secrets confidential.
- A non-compete agreement prohibits employees from working with competitors, geographical locations, or markets during the period specified in the non-compete agreement.
- It prevents employees from getting a new job in their field if they leave.
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Why and When To Use a Noncompete Agreement?
Businesses use non-compete agreements to secure their intellectual property, trade secrets, proprietary information, and procedures for producing their goods and services.
Businesses would lose their competitive edge if they did not have contracts governing the disbursement of information to competitors. Former employees could legally use the information they gained at one Company to gain an advantage at their new employer. Additionally, ex-employees may be able to start their businesses using the knowledge they gained from their previous employer.
A company may lose clients or get out of the market when competitors receive this information. Non-competes are, therefore, an essential part of many companies' hiring processes.
How does a Noncompete Agreement Function?
There should be both fairness and equity in non-compete agreements for all parties. For them to be enforceable, they must contain the following information:
- The date on which the contract will take effect
- An explanation of why the Company enacted the agreement.
- The dates during which the employee will not be allowed to compete and the location that the deal will cover
- Details regarding the compensation to be provided to the noncompeting party
- After an employee leaves a company, a non-compete agreement usually remains in effect for some time.
Challenges to Determine Non-Compete Agreement
This clause prohibits employees from disclosing proprietary information or secrets to third parties during or after employment.
- A non-competition agreement is legally binding if it contains reasonable limitations, such as clear, realistic boundaries for an employee's work area or an exact amount of time before an employee can return to work.
- Non-competes limit human ability to work for or to start rival firms, leaving workers with diminished bargaining power and fewer options for pursuing career opportunities.
- The non-compete agreement might apply to a company that offers a specific product or service and is one of two or three in a market. To prevent salespeople from moving to a direct competitor and taking their client list with them, companies may ask their employees to sign non-compete agreements. For instance, a software company may not want its developers to go to a competitor where they can share detailed information about the products they are developing.
Noncompete Agreement Example
Given below is an example of a non-compete agreement.
The following is an employment contract between [NAME OF EMPLOYEE] ("You") and the Company [NAME OF COMPANY]. The agreement is in effect as of _____ ("Effective Date").
The following are the terms and conditions under which you, intending to be legally bound, agree to accept employment at [NAME OF COMPANY]:
1. Term of Agreement. As of the Effective Date, this agreement shall remain in effect for the duration of your employment with the Company and one year after that.
2. Limitations of this Agreement. The agreement does not constitute an employment contract, and neither You nor the Company is obligated to work for a specific time.
A covenant not to compete or solicit, as defined in this agreement, is the subject matter of this agreement.
3. Covenant Not to Compete. You agree that you will not engage in any business activity or work for any company that competes during your employment. You must refrain from engaging in any business activity that competes with the Company within ______ miles of the facility in which you were employed for one (1) year following the termination of your employment.
4. Severable Provisions. The provisions of this agreement are severable, and if any one or more conditions are deemed illegal or otherwise unenforceable, in whole or in part, the remaining provisions and any partially unenforceable provisions to the extent enforceable remain binding and enforceable.
5. Modifications. A modification to this agreement must be in writing and signed by both You and the Company.
6. Jurisdiction and Venue. Laws of the State of _______ govern this agreement. You will hear any claim arising out of this agreement in any court of competent jurisdiction without regard to the conflict of laws provisions. Date ______ [NAME OF COMPANY]
You acknowledge that you have read and understood the prior agreement, agree to comply with its terms, and have received a copy.
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Advantages of Non Compete Agreement
Listed below are the benefits of implementing a non-compete agreement in your organisation:
1. Helps to Prevent Ex-employees from Competing:
Your valuable employees will not be able to work for a competitor when you have a non-compete agreement. It can also save you from losing critical customers if an employee leaves or starts their own competing business.
2. They Safeguard Your Trade Secrets:
Many "trade secrets," including formulas, patterns, compilations, programs, devices, methods, techniques, or processes, have value because they aren't widely known or kept secret. By using a non-disclosure agreement, a business owner can maintain the confidentiality of this kind of information. More than a non-disclosure agreement is required if a former employee joins a competitor. When you combine a non-disclosure agreement with a non-compete deal, you can ensure that your former employees cannot exploit the information you gave them.
3. Helps to Retain Your Employees:
Employees may be less likely to leave if a non-compete agreement exists. Your contract can even include a payback clause, requiring your employees to reimburse you for your training costs if they leave early. Investing in your people is an investment you should protect as an employer.
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Disadvantages of Non Compete Agreement
Following are some cons of a non-compete agreement.
Non-compete agreements are limited in length, geography, and subject matter according to the law. If their terms are two years or less, they consider this reasonable. Still, eventually, the former employee will probably be able to work for or for a competitor.
In-demand job candidates and high-performing employees may prefer to avoid signing non-compete agreements. Often, the requirement of a non-compete can cause potential and existing employees to leave your company for an employer who will not impose this type of restriction.
3. Enforcing them can be Expensive:
You must sue the party who violated the contract to implement it. It may take enormous energy and time to obtain a worthless judgment if the former employee cannot pay a decision. It would help if you weighed the costs against the benefits before pursuing litigation with your attorney.
Whether you are an employee or an employer, you should take signing non-compete agreements seriously. Take the time to weigh the pros and cons of the non-compete agreement and determine if it is necessary for you. Getting qualified legal assistance in this matter is not unnecessary. Non-competition agreements prevent employees from entering professions or markets that the employer considers to be in direct competition with their business.
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