A covenant not to compete, also called a non-competitive clause, is a formal agreement asking former employees not to perform similar work within a designated area for a specified amount of time after leaving their original employer. Many workers sign one as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. This agreement is generally legal and enforceable, although there are some exceptions.
Whenever a company recruits skilled employees, it invests a significant amount of time and training. It often takes years before a research chemist or a design engineer develops a workable knowledge of a company's product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business. This is why companies encourage the signing of a covenant not to compete. Without something in writing, there would be few legal ways to prevent an employee from starting a new company across town.
A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company's customer base to unfair advantage. The covenant often defines a broad geographical area considered off-limits to former employees, possibly hundreds or even thousands of miles.
Another area of concern covered by the agreement is a potential "brain drain." Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite limits on the hiring or recruiting of employees. This type of agreement is difficult to enforce in real life, since many employees do not feel legally obligated to remain with any company without an iron-clad contract.
It may also define a specific amount of time before a former employee can seek employment in a similar field. This may seem especially harsh to outsiders, since the freedom to seek gainful employment appears to be a natural right for any worker. In reality, the potential damage of a disgruntled former employee, especially one with intimate knowledge of a company's inner workings, can be tremendous. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the agreement have been met.
Because the use of a covenant not to compete can be controversial, a handful of jurisdictions have already banned this type of employee contract. In the US, the legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration. An agreement must be reasonable and specific, with defined time periods and coverage areas. If it gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such a case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.
