How to Structure a Proper Noncompete Agreement

Use a noncompete agreement carefully. They are often used improperly, which means a judge could rule it unenforceable and every.single.employee will be released from their noncompete obligations. Most business owners know a noncompete must be limited in time and geography, but the analysis has expanded beyond these limitations.

Think Management

Noncompete agreements are designed to protect high-level information, processes and know-how. They should not be used for every employee – only the employees who are strategic within your company. Not too long ago, Jimmy John’s gourmet sandwiches settled a lawsuit for $100,000 for making its delivery drivers sign a noncompete agreement. The company suffered bad employee relations for trying to impose a noncompete on nonskilled workers and also suffered bad public relations.

Think Specific Skills

The noncompete can only prohibit an employee from taking a job utilizing similar skills with a competitor. If the employee is prohibited from taking ANY job with a competitor, the agreement will be too broad (and unenforceable). The North Carolina Court of Appeals has ruled a noncompete provision was too broad (and therefore unenforceable) because it prohibited the employee from working for the competitor “in any capacity, including as a custodian.”

Think Related to a Legitimate Business Interest

Finally, a noncompete must be related to a legitimate business interest of the employer, such as protecting customer contracts or confidential information. Courts have found no legitimate business interest is protected where a former employee is prohibited from calling on all customers of the employer, rather than just the customers the employee had actually worked with. Similarly, North Carolina doesn’t like the standard “direct or indirect” competition language, as it doesn’t clearly describe impermissible “indirect” activities that harm a legitimate business interest of the employer.

Think First Day of Work or Other Meaningful Compensation

Finally, in North Carolina, there must be some kind of compensation (consideration) for a noncompete agreement. It can be a new job (provided the noncompete agreement is literally signed on the first day of work), a promotion, or new responsibilities. In North Carolina, keeping an existing job is not a permissible type of compensation for requiring an existing employee to sign a noncompete agreement. In that instance, there should be a meaningful bonus.

If you are considering a noncompete, please contact us to make sure it will be enforceable.