Non-compete clauses. You’ve likely heard the term but if you’re still a little fuzzy on how they may relate to your business, then we’ve got you, girlfriend. Let’s dig in.
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What is a Non-Compete Clause?
A non-compete clause is a term used in contract law that can help employers protect their business interests.
Now in English.
A non-compete clause is a legally binding section in a contract where one party agrees not to engage in any activities defined by the contract as competition. These are most often used in employment contracts.
Non-competes serve two key purposes:
- Employers can keep valuable information (like intellectual property) away from competitors.
- Preventing you or your former employees or contractors* from working directly with business competitors, at least for a certain length of time.
*Non-compete language may be included in a contract to an employee or a contractor, but it’s super important that you handle these categories of workers differently. Generally speaking, it comes down to “right of control.” Remember: an employee works for you, but a contractor works with you. The latter must retain their independence and autonomy to retain that status.
Non-Compete Clause Examples
Whether a non-compete is valid, binding, and enforceable depends on the jurisdiction.
While the terms of a non-compete clause may seem reasonable, they can prove restrictive in practice and be quite difficult to enforce depending on the law that applies.
Generally speaking, the courts disfavor clauses that restrict trade or infringe on an individual’s rights and their mobility in the workplace. There are exceptions though that can make non-compete clauses valid and enforceable in the eyes of the law.
Here are three examples of how non-compete agreements (NCAs) might work.
Example 1: let’s say you have an executive coaching company and you’ve developed a course. You may train someone on your team to deliver your content in your way. A non-compete could be useful to ensure they don’t take all of your great ideas and use them for themselves or with a competitor.
Example 2: perhaps you’ve hired a team of independent contractors for your web design agency. You may want to include a non-compete clause in their independent contractor agreement that prohibits them from reaching out to your clients for work separate from you.
Note: The alternative for business owners concerned with a contract worker competing with their business is to include a non-solicitation clause in your independent contractor agreement. This means that anyone who works for/with you can’t hustle for sales from your clients.
Example 3: you, as a business owner, may be asked to sign a non-compete. You may be providing marketing services for a business. The company you work for may ask you to sign a non-compete that stipulates you will not provide marketing services for their competitors.
As you can see, non-competes apply differently in different situations. And since you wear allllll the hats, it’s important to know how they play out in different scenarios.
Non-Competes for Business Owners
As a business owner, you’re handling your company. You want to protect your business with all you’ve got. A non-compete agreement may limit how your people share the love of your big ideas and processes, which is important.
As a business owner, you may want to consider non-competes for the following:
- When working with independent contractors, vendors, and trades — this is true, but comes with a big “careful, girl!” Remember that independent contracts are just that: they are not your employees (and unless you want to organize for health insurance, PTO, and the rest), they shouldn’t be. You’ll need to be careful with non-compete clauses with ICs, because of their delineation.
- Consider non-compete or other limitations when working with third-party vendors who will have access to sensitive company information (i.e. intellectual or creative property).
- For employees who will be working directly with sensitive company information, you do have the right to treat them as employees and restrict what they can/can’t do. This may be a good opportunity for a non-compete.
A non-compete can hold some weight and protect both parties in several different ways.
Now let’s consider scenario numero dos: if you are functioning in a role as an independent contractor, you may be asked to sign a non-compete by the company you’re working for. Here’s what that might look like for you.
Non-Competes for Independent Contractors
An independent contractor is an outsider of sorts, joining with a business to provide their unique services. They may also work with other businesses in the same or different industries, posing a risk of competition.
It’s likely that you’ll get presented with a contract that contains a non-compete clause at some point in your IC gig.
Here are some quick As to common Qs about non-competes for independent contractors:
- Why would an independent contractor be asked to sign a non-compete?
A non-compete is a way for a company to protect its interests (creative property, data, contact lists, etc.). For example, let’s say you’re a talented digital strategy consultant. The business you’re working for may ask you to sign a non-compete agreement so you don’t take their strategic plan and know-how to another direct competitor.
They may not want you creating strategies for another company in the same industry or region, as this could pose a conflict of interest.
- What are the risks of signing a non-compete as an independent contractor?
A risk of signing a non-compete is that it could limit your ability to conduct business or win new business. We’ll talk more on that in a minute.
- Pay attention to the details
Before signing a non-compete agreement or any agreement that contains a non-compete clause, educate yourself on the laws in your state. A well crafted non-compete will specify timeline, geographical area, definition of a competitor, and possible compensation. NCAs may include a bonus for not working with competitors.
More Info on Non-Competes
Whichever end of a non-compete you find yourself on, you’re probably going to go down the Google rabbit trail of questions like these:
Can non-competes be negotiated?
Non-competes can sometimes be negotiated. You may negotiate the agreement so that it is mutually beneficial. In some cases, you may request to waive the non-compete clause altogether.
Are non-competes enforceable?
Like any legal agreement, non-competes are only as powerful as a court’s ability to enforce them. If you (as a party on the contract) violate a non-compete agreement, the other party could possibly take you to court.
What are reasonable versus unreasonable restraints?
Reasonable restraint is defined as justified restraint to protect the client or to protect others from the client’s actions.
Hmm. Ok: let’s say you have a team of independent contractors for marketing, web design, and social media. Reasonable restraint would be stipulating that each of these contractors cannot reach out to offer their services independently to your clients.
Unreasonable restraint would be telling that same team of contractors that they cannot work in marketing, web design, or social media in your entire region for five years after they worked for you.
If I Can’t Do a Non-Compete, What Can I Do?
If most of your lean mean team is currently composed of independent contractors, you don’t always have to go with a non-compete. To enforce non-competition agreements, your people may have to meet certain earning thresholds and can’t be subject to “unreasonable restraints.”
You may choose instead to include other limitations that safeguard you/your business but aren’t non-competes. These options include a non-solicitation agreement (mentioned above), work-for-hire clauses, or a non-disclosure agreement (NDA).
An NDA is an especially powerful way to keep your bright ideas hush-hush (legally). Just so happens we have an NDA handy for you: check it out here.
Legal Support for Your Online Business
The fact that you’re reading this blog likely means you’ve created something worth protecting. People want to work with you and want to work for you.
That’s worth celebrating… and so are you!
Non-compete clauses may be important for you or the people you work for. Check into them. Sign them if you want. Negotiate if you don’t. And know that we ALWAYS have your back.
Every fempreneur needs to bounce her ideas off of someone legit, which is why we created The Legacy Lounge™. From leading your cheering section to providing expertly crafted legal documents and contracts, The Legal Godfairy is in. your. corner. Just where we want to be.
*Disclaimer: This blog post has been prepared solely for general information and educational purposes. It is not intended to provide, nor should it be relied on for, legal advice. Should you require advice regarding a specific matter, appropriate legal or other professional advice should be obtained.