When starting with a new company there’s a lot of paperwork to be signed and many people don’t fully understand what they are agreeing to. Let's break down the differences between two common types of restrictive covenants, a Non-Compete and Non-Solicit Agreement.
A non-compete agreement is a contract where the employee is restricted and agrees to not compete with the employer during and after termination for a period of time and also within a specific distance from the company. This can limit your right to work and seek other employment. Non-competes can also be used to restrict competition from subcontractors, between business partners, or when a business is sold.
For example: your employment ends, you are then prohibited from working for a competitor in a similar job field/industry within a 10-mile radius for 3 years. If you do not honor this agreement, your former employer can pursue legal action against you. This could involve an injunction, lawsuit, or financial penalties.
This changes state to state. Some states do not enforce non-compete agreements. An example: in the state of California non-competes in employment contracts are illegal and unenforceable.
“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
In North Carolina, non-competes are allowed but not favored. To be enforced, must be reasonable in time and territory and protect a legitimate business interest. They must also be in writing by statute.
“No contract or agreement hereafter made, limiting the rights of any person to do business anywhere in the State of North Carolina shall be enforceable unless such agreement is in writing duly signed by the party who agrees not to enter into any such business within such territory: Provided, nothing herein shall be construed to legalize any contract or agreement not to enter into business in the State of North Carolina, or at any point in the State of North Carolina, which contract is now illegal, or which contract is made illegal by any other section of this Chapter.”
It is important to look up what your state regulates and educate yourself before creating or signing contracts.
If you plan on moving your business to North Carolina, make sure you update your contracts to abide by the state laws.
A non-solicitation agreement is a contract where an employee agrees to not solicit a company’s clients or customers for their own benefit or the benefit of a competitor once they leave the company. Like non-competes, non-solicitation agreements are also often used with subcontractors, business partners, and vendors. The employee must agree to not solicit for a length of time. Unlike a non-compete agreement, the restricted person can start working immediately within the same field/industry and location without restriction.
Non-solicitation agreements are more favorable because they do not impose limitations on an employee’s right to work. They are viewed as providing reasonable conditions that allow the employee to continue working in their area of expertise. However, some states do not enforce non-solicitation agreements.
If you violate a non-solicit agreement, your former employer could issue a cease-and-desist letter. If they can prove that the agreement is valid and the employee went against it, they can then sue for injunction relief or temporary restraining order and sue for breach of contract. This can include actual damages, compensatory damages, punitive damages, and liquidated damages, as well as court and attorney fees.
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