HOW TO DRAFT A NON-COMPETE AGREEMENT

HOW TO DRAFT A NON-COMPETE AGREEMENT

INTRODUCTION

The Non-Compete Clause or the Non-Compete Agreement or the Non-Compete Convent is the standard practice followed by employers when appointing a new employee. It is a basic contract between the employer and the employee according to which the employee agrees that he/ she will not enter into any competition with the employer during or after the employment for a certain period of time. This contract thus prevents the employee from taking any part in market or under his/ her professional capacity in any business directly resulting into creating a competition with the employer. Initially the Non-Compete Agreement was meant only for the high-ranking employees and those with specialized knowledge of your business.

The powers of Non-Compete agreement can be enforced when the professional relationship between the employer and the employee ends and employer now wants to use his powers of the Non-Compete clause/ agreement and prevent employee from entering into any competition whether continuing work in same market or starting any new business which may create competition to employer in any way.

Employers also create Non-Competition agreement as a standard practice to protect themselves from any former employee revealing and business secrets, tactic, marketing strategies or any sensitive information about the business operations, clients, customers, formula, pricing strategy etc. this agreement is signed between the employer and employee usually at the time of when the employee is hired by the employer. Non- Compete Agreements are very popular in Media, Information Technology (IT) sector, Financial industry, Corporate world, Manufacturing, Professional fields etc.

NON-COMPETE AGREEMENT

The Non-Compete Agreement can be signed between various parties such as, Employer-Employee, companies-vendor, Freelancer. Generally, this agreement protects the intellectual property of the clients of the business. As these agreements are becoming universally used by various organizations for regulating their employees, many states are very careful about the wording and legality of agreements. The non-compete agreement need to be very specific on the restrictions so imposed on the employee for which the agreement is drafted.

The Non-Compete Agreement is used at:

  1. Time of Hiring of New Employee:

Non- compete is one of the important conditions of the employment package now days. It is recognised legally if there is some value offered to the employee for such agreement. When such Non-Compete agreement is signed at the time of hiring so the employment offer and salary are considered as sufficient incentive for the employee for singing such agreement.

  1. Time When Company Needs Privacy Laws When the Employee Works with Some Sensitive Information Related to Business:

This agreement can be signed any while appointing a new employee or after such appointment during the course of employment. When this agreement is signed during the course of employment so the employee needs to be provided with some incentive for signing to such agreement and accepting all the terms and conditions to it as after any such incentive received by the employee such agreement becomes legally binding.

  1. Time of Purchasing the company from previous owner:

While purchasing a company the non-compete agreement plays a vital role as it ensures that the previous owner won’t use is knowledge and expertise of such field and create any competition for the company based on such knowledge and expertise.

 

WORKING OF NON-COMPETE AGREEMENT

The Non-compete agreement should be drafted in a manner that it is fair and equitable for both the parties. The agreement becomes enforceable when it consists of the following information:

  1. A date at which the agreement will commence;
  2. Reason for formation of such agreement (Nature of Prohibition);
  3. Time duration and location from which the employee will be barred to work in any manner creating any competition for the employer;
  4. Details of compensation if there is any violation of said agreement.

There are many challenges for the employer to make the non-compete agreement enforceable. A Non-Compete agreement is only binding when it has reasonable limitations, description restricted location, duration for such restriction, however enforceability of the Non-Compete agreement varies from state to state depending upon various laws made to govern such agreements. A Non-Compete agreement benefits the employer by:

  1. Protecting Trade Secrets

As it prevents employees from using any sensitive information of the company or providing it to any competitors.

  1. Provides Consistency

It keeps company employee who have less desire to change their job consistent.

  1. Incentivizes employer who provides costly training to it employees

It reduces chances of the skilled learned by employees with the costly training methods used by employer and then taking such skills and knowledge to competitors and benefiting their business from the information gained on expenses of employer.

  1. Increase trust and Responsibility

It might give an impression of being restrictive after signing such an agreement but it also comes with an incentive which is building trust in eyes of employer.

  1. Protects from unfair competition

This agreement prevents business owners and ex-employees from opening similar business and brands and competing with the existing customer base.

  1. Gives better negotiating powers

Signing this agreement means accepting restrictions in future in case employee have to leave the company, employer and employee have the right to negotiate and modify certain terms and conditions.

According to Indian law, provisions of term of employment are not regarded as “Restrictive covenants” but having such provisions applicable after a person leaves the organisation is against the laws of the Indian Contract act. Section 27 states that “Any agreement that restraints anyone from exercising a lawful profession, Trade or business is void”. Any restraints of employee which is not categorised under general restriction for Non- Compete agreement are considered void. Key employee contracts provide a non-compete restriction during employment along with a 'garden leave' or a ‘fixed-term clause’.

According to the ‘garden Leave’ clause an employee is required to spend a notice period at home, according to which he/she is prohibited from joining any competitor, while he receives remuneration and according to fixed-term contract, an employee can be restricted from joining a competitor during the term of employment. Another clause can be included in the Non-compete Agreement is the Employee bond. According to employee bond an employee after receiving some training from employer or on his behalf has to work with the company for a fixed period, if he is unable to do that then he is liable for compensation to the employer.

WHAT IS NON COMPETING AGREEMENT IN HINDI BY BHAVPREET SINGH SONI | TO KNOW MORE, VISIT - 

 

HOW TO DRAFT A NON-COMPETE AGREEMENT

While drafting an agreement which is meant to be enforceable in law, one needs to be very careful on the words and legality so followed in the agreement. For which person should be highly experienced and must have good knowledge about everything he/she is mentioned in the agreement and what might be the consequences of any mistake in such agreement. To draft a Non-compete Agreement things to be kept in mind are:

  1. Amount of Compensation;
  2. Geological region of restriction so imposed;
  3. Industry of the field of work;
  4. Employee specialization so restricted;
  5. Assignment provision;
  6. Proper legislations.

The non-compete agreement should be drafted carefully keeping in mind what all restrictions are to be imposed, for how long will such restrictions can be imposed, where all will these restrictions can be imposed, amount of compensation on any infringement, etc. Drafting a Non- compete Agreement consists of:

  1. Acknowledge and Relationship clause:

According to this clause the parties agrees and acknowledges that the agreement is drafted in consideration of the promises agreed to in the Agreement. This clause must consist of the names and addresses of the parties involved, date and the duration of the agreement and the reason for the agreement.

  1. Non-Competition clause:

This clause states that for mention duration and duration after the termination of the employee such agreement prohibits the employee from working as an employee, officer, director, partner, consultant, agent, owner, or in any other capacity resulting in any way competition with the Company. This clause consists of geographic area covered by the agreement, the compensation or "consideration" for signing the agreement, list of Activities prohibited and amount of compensation for any infringement.

  1. Applicable law clause:

This clause states that the agreement so drafted is based on interpretation from such mentioned source of legislation and provisions and the terms of the agreement will be governed by and construed in accordance with the laws of the State and will be subject to the exclusive jurisdiction of the federal and state courts.

  1. Representative acknowledgement clause:

According to this clause the representative accepts and acknowledges that this Agreement has been specifically drafted between the Parties, he/she has had the opportunity to obtain legal counsel to review this Agreement, the restrictions imposed are fair and reasonably necessary to protect the business interests of the Company, and such restrictions will not place an undue burden upon the Representative’s livelihood in the event of enforcement of such restrictions mentioned.

 

 

BY- GAURAV GUPTA