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Should your employees sign noncompete agreements?

Many business owners require all new hires to sign noncompete agreements as a condition of their employment. These contracts are legally binding agreements stating the employees shall not become competitors with their former employer after the employee leaves the company.

Whether the noncompete agreement can stand up in court if challenged depends greatly on its wording and reasonableness. Often referred to as noncompete clauses (NCCs), if the NCC is so broad that it could deprive the former employee of his or her future livelihood, it might withstand a legal challenge.

NCCs that prohibit former employees from revealing trade secrets, client information, company procedures and policies that are not common knowledge, business strategies and other protected information generally will hold up in court. So might an NCC that demands a former employee not open a competing business within the same geographic region or for a stated period of time.

Open-ended NCCs that prevent an individual from ever working in that field in any geographic location typically wouldn't hold water in front of a judge. After all, former employees do have the right to ply their trade in their chosen field.

When designing an NCC, it's a good idea not to make it so restrictive that it almost begs to be challenged. That will just cost you a bundle to defend in legal fees and, ultimately, the former employee is likely to prevail.

The goal of a solid noncompete agreement is to be equitable and fair to both parties. To legally be binding, they must:

  • Have a reason to be enacted
  • Include effective dates the agreement begins
  • State the time frame the former worker is barred from competing, and in what location they may not compete
  • List the compensation the noncompeting party will receive for agreeing to those terms

To be sure that your NCC withstands any legal challenges, learn all that you can about the laws in Arizona that could affect your agreement's efficacy.

Source: The Balance, "What Is a Noncompete Agreement?," Alison Doyle, Jan. 26, 2018

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