Non-compete agreements are essential to maintaining a successful business. Customers frequently remain loyal to their stylists, not the salon. Crafting legally binding, non-compete agreements protects your company's most valuable asset: the customer.
What is a non-compete agreement? Briefly, the goal of the non-compete is to protect the employer's proprietary rights such as trade confidential information, customer bases, and capital investments (i.e. employees). The non-compete accomplishes this goal by restricting a former employee's future employment options. Specifically, the non-agreement can prevent a former employee from:
- Working for a certain time period
- Working in a specific geographical radius
- Soliciting former clients and/or co-workers
- Disclosing confidential information, etc.
Take this simplified hypothetical: A stylist leaves your employment after five years of working for you. The stylist has built up a considerable client base, and she wants to open her own salon. A non-compete agreement ensures that the stylist cannot use your client list to solicit clients, nor solicit your current employees to come work for her. Also, the non-compete agreement can prevent the former employee from working in a geographic area (i.e. 4 mile radius) and from working for a certain time period (i.e. 1 year). Without a non-compete agreement, the stylist could immediately begin to compete for your client base and business. Lack of a non-compete agreement, leaves your business assets vulnerable.
When creating a non-compete agreement, a lawyer's expertise is essential. Creating a non-compete agreement is not simple. Although a non-compete agreement can cover a variety factors, the law has requirements. Specifically, for a valid non-compete agreement, the law requires that the non-compete agreement provides:
- A good business reason
- A benefit to the signatory employee
- Reasonable terms.
As to number one, the law requires your business to provide a good reason for the non-compete agreement. For example, using the non-compete agreement as a mechanism to punish a departing employee is not valid. Valid reasons can include, but are not limited to, protecting trade secrets, confidential information, and customer bases.
As to number two, the non-compete agreement must provide a benefit to the employee. Usually, making a job offer contingent on the employee signing the non-compete agreement satisfies this requirement. However, because an employee's circumstances can vary, the employee's benefit is not always obvious. Consult an attorney if you are unsure what benefit your non-compete agreement provides the employee.
As to the last point of reasonable terms, courts will not enforce a non-compete agreement that is unreasonable (i.e. too restricting). Because there is inherent tension between a former employee's right to earn a living and an employer's right to protect its business, the courts will not enforce a contract that unreasonably deters or restricts a former employee's right to earn a living. State's differ on what are reasonable terms for a non-compete agreement (California, for example, may not enforce any form of a non-compete). The main take-away: In order to ensure that your non-compete agreement is legally enforceable, contact an attorney to make sure your non-compete contains reasonable terms and restrictions.
To wrap it up, a non-compete agreement provides tangible, economic benefits to your business. But, creating and enforcing a non-compete agreement is tricky. In order to protect your business's assets, make sure you receive the appropriate professional advice for a non-compete agreement.
Matthew Walsh is a Chicago-based senior partner at Hinshaw & Culbertson LLP, a full-service national law firm with more than 500 lawyers. He represents hair care industry clients—and businesses around the country—in litigated and other legal matters, including business, employment and product-related disputes, and in contract negotiations.
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