What to Know Before Signing a Non-Compete Clause or Non-Disclosure Agreement
Non-compete clause and non-disclosure agreement used to be reserved for high-level executives and top-secret industries.
But they are now popping up in industries you least expect.
As an employee, it’s important to know what these agreements are all about and how you should deal with them when presented with one.
THE TWO AGREEMENTS MEAN DIFFERENT THINGS
Let’s start by examining what the agreements are since they both mean different things and could be offered under different circumstances.
The definition of a non-compete clause
The non-compete clause is signed to cover situations that might occur after you stop working with your current employer. It prevents you from directly competing with your former employer once you end your contract with them.
The agreement outlines how long you’re prevented from competing with the former employer and often goes into more details in terms of the geographical limits of the contract.
The purpose of a non-compete clause or NCC is to protect your employer from you just resigning and taking your talent to a competitor – leaving them in trouble.
It’s typically not just about working for a competitor either but it also prevents you from launching your own competing business.
If you were fighting for the same commercial space, then you would be prevented from doing it for a specific period of time.
The definition of a non-disclosure agreement
The non-disclosure agreement deals with sharing information.
When you sign the NDA, you agree not to disclose anything the company considers proprietary or confidential.
You are not allowed to share this information or use it to your advantage while you’re in the company or after you’ve left it. The information can range from business plans to models and financial information.
The purpose is to prevent you from leaking confidential information that might help the competitors.
Unlike the NCC, you are able to start your own business or work for a competitor but you just can’t use the proprietary or confidential information you gained during employment at the new job.
NEVER SIGN EITHER AGREEMENT ON THE SPOT
Now, if an employer presents you with an NCC or an NDA to sign, you should never do so on the spot.
There is no legal justification for the employer to ask you to sign one immediately – you must be given time to go over the paper. You shouldn’t make the opposite hasty decision either.
Don’t refuse to sign one altogether before understanding what the agreement is about. There are valid reasons for the employer to ask you to sign it and the agreements are not always harmful or bad.
You also need to remember the employer could potentially withdraw their job offer if you refuse to sign the agreement.
The Winona Search Group, a Minnesota-based recruitment company, says on their website, “General objections to signing non-competes can end up being red flags for employers” – rather than just saying ‘no’, you want to produce an informed response to open dialogue.
When you’re presented with either of the agreements, you should ask to have a day or two to go over it before signing. You want to fully understand the implications because once you sign it, the document does become legally binding.
If you feel like the details are unclear or murky, you should consider discussing the content with an employment attorney.
You might find free legal advice online.
This is a useful thing to consider, especially if you’ve never had to sign an NCC or NDA before.
Once you are ready to sign the document, you need to remember to ask for a copy. Some employers might offer to hold on to the only copy but you have the legal right to your own copy and you should definitely get it. Keep it in your records to ensure it isn’t changed.
If the is any problem with the agreement, having a copy will help you dispute it or take proceedings further.
Furthermore, remember the employer has to present you with a new version of the agreement to sign if they want to make changes.
It’ll effectively be a new document, which you then need to read and understand before signing. The employer cannot make changes without your knowledge or without you agreeing to them.
YOU CAN NEGOTIATE THE AGREEMENTS
It’s important to understand you don’t have to agree to sign the documents as they are presented to you. It is a good idea to negotiate the agreements, especially if you find something troubling.
The employer may or may not agree to this but it’s always worth asking for changes if you are uncomfortable with the agreements in their current form.
When you are negotiating either the NCC or the NDA, you should do the following:
Know what you are looking to achieve. Have a clear idea of the clauses you want to change or the details you aren’t comfortable with. It’s much easier to start negotiations when you know what you want to change rather than just stating you want the documents changed.
Do you think the specific limitations are off (such as timeframe or geographical limits)? Perhaps you find the wording wrong or unclear. Whatever your objections, it’s important to determine what you want out of the negotiations and what a good agreement would look like to you.
Understand the company’s real concerns. It’s important to realize the real concerns the company will have and the reasons they are asking employees to sign these agreements. You want to ensure you don’t ask the agreement to be scrapped but you show compassion and understanding for the employer’s concerns.
The employer might agree to not have a geographic limitation in the NCC if you agree to add a non-solicitation clause to the agreement.
You could also point out the timeline for NDA seems too excessive in terms of your career progression. Instead of scrapping it altogether, you could simply suggest the timeframe is cut a little shorter.
This shows the employer you understand where they are coming from. It reassures them that you take the agreements seriously but you also have to think about your own career path and the impact the agreement might have on you.
Ask for career reassurances. It is important to ensure you don’t end up signing the document only to feel like your career progression is stuck.
Since you might be restricted to working with a competitor or starting your own business, you don’t want your career to just be stuck.
The employer should provide you with enough reassurances that career progression is possible at the firm – you want to have the ability to advance and change jobs, as well as to improve your earnings.
If you can’t get any of these reassurances then you need to consider what the agreements might mean for your career path.
Consult the HR department or an employment attorney if needed. Throughout the negotiations, you should talk to an attorney or the HR department to clear any confusion and to get support.
You don’t want to deal with the issues alone if you feel uncertain about the procedures or the different elements in the agreement.
THE CONSEQUENCES OF BREAKING THE NCC OR NDA ARE SEVERE
You also need to understand the documents are not just a random paper you need to sign. Breaking the NCC or the NDA is not a minor thing.
It can have serious consequences, which is why it’s essential for you to understand the agreement fully before signing.
Businesses take confidentiality seriously and they are always wary of competitors gaining ground – they will look to enforce these agreements to protect the business.
What can happen if you are found to be in breach of the agreement?
Your employer is most likely going to sue you and you’ll need to defend yourself in court.
Of course, the issue might be settled before it goes that far – you should consult a lawyer to ensure the issue is resolved smoothly.
It is your responsibility to prove you haven’t broken the contract. If you can’t do this and the employer has a strong case against you, then you will most likely face two outcomes:
- You will need to pay a fine. This might be determined by the actual agreement or it might be decided by the judge.
- You will lose your job. If you are working for the employer and you break the NDA, the employer could dismiss you from your job.
It’s actually this threat of a costly legal battle that makes employers use these agreements. The threat of having to pay a fine can be enough for employees to seek employment elsewhere or to stay with the company to avoid having to find an employer that’s not direct competition.
Now, if you are thinking the fee can’t be that bad and you are prepared to lose your job, here are a few examples of the cost of breaching the agreements.
According to a post by G & G Law, the amounts former employers have won have been anything from $7,313.72 to $138,000.
Therefore, you aren’t going to be talking about a few pennies – making it imperative, you know what you are signing up for.
THE RULING BOILS DOWN TO REASONABLE AND UNREASONABLE DEMANDS
When it comes down to considering whether you’ve broken the agreement or not, it’s the courts that can have the final say.
What the decision boils down to is to decide whether the demands in the agreements are reasonable or not.
Five major points determine the ruling
When courts are determining the legality of an NCC or an NDA, they focus on examining five points. These are:
The potential harm – When presenting the case to courts, the employer has to be able to establish your breach as harmful or potentially harmful to the company. You simply breaking the agreement tend not to be enough. The employer has to show that your specific action in breaking the agreement harmed or had the potential to harm the business.
There must be legitimate business interest at stake for the courts to accept the claims. This means your action must have an impact on trade secrets, proprietary information, investments in special technology or training, or harm in terms of long-term customer relationships.
The specific time period – Courts will also examine the time period defined by the agreement (if any). The idea is to determine whether it’s reasonable or not and the ruling can often depend on the industry and the nature of the job.
For example, when considering the non-compete contract, the courts will examine what is a reasonable timeframe for preventing you from working for a competitor or launching your own business. If you’re a hairdresser, then anything below a year might seem reasonable (often even less than this).
On the other hand, if you’ve been a top executive, the courts might think anything from two to five years can be a reasonable timeframe.
The prohibited territory – Similar to the previous point, the courts will examine the territory defined in the agreement and whether it is reasonable.
In today’s world, most people move about quite a bit and NCCs and NDAs must take into account this kind of territorial context. You can’t expect the local cafeteria in a different country is a competitor of the bakery you worked for 20,000 miles away!
The reasonable territory, therefore, depends on the business and the nature of the organization. In the example of the hairdresser, a small ten-mile perimeter might be considered reasonable and for the executive of a global company, the perimeter might be much wider.
The impact on the employee – The courts will also examine whether the agreements seriously hinder your ability to work. In essence, they will consider the impact of the agreement on your career path.
Your ability to make a living will be considered and things such as forced relocation can come into question. For example, the agreement might be deemed unreasonable if it means you have no other option than to move to a different city, state or country.
On the other hand, if your skills are easily transferable and you aren’t restricted by industry, you might not be as successful in overturning the agreement.
The interest of the general public – Finally, there is the consideration on what the agreement means for the general public, especially in terms of the issue of monopoly.
In essence, if the agreements create a situation that severely stifles competition, then it might be deemed unacceptable because it helps to create a monopoly.
It’s important to understand there needs to be a distinction between normal competition and intended harm. The courts won’t accept agreements that prevent normal competition from taking place.
Now, it’s important to remember the above five points are just things the courts will consider – how much weight they give to each point will depend on the courts and the local laws.
It’s, nonetheless, a good idea to understand these points as it can help you during the negotiations and in figuring out what the agreements might mean to you.
RELEASING YOURSELF FROM THE AGREEMENT
Before you sign the document, it’s essential to check what the agreement says about the length of validity.
You should know how long it will be enforced and what happens when you leave the job.
If these issues are not clearly defined, you definitely want to ask the employer to add them to the contract before signing.
A detailed timeline for the enforcement will help you live your life accordingly and ensures you don’t end up breaking the agreement.
Now, despite the contract having a release clause or defined enforcement time, it is possible to ask for a release earlier.
For example, if you are changing jobs, you might negotiate with the employer whether it is possible to release you immediately from either of the agreements.
Whether you will be released from the contract or not will depend on your reasons for leaving the job.
If you are changing jobs, the employer might feel the agreement doesn’t have to be in place any longer – especially if you are changing industries or moving far away.
However, if you are leaving to work for a direct competitor, it’s unlikely the employer agrees to release you from the clause.
If you have been laid off, it’s definitely a good idea to ask to be released.
Your argument in this scenario is strong – your employment has ended without you wanting that to happen.
Therefore, you’re not leaving the employer out of your own desire and it’s not reasonable for the employer to enforce the agreements.
However, it is not something they are necessarily required to do – so you shouldn’t expect it to automatically happen.
THE BOTTOM LINE
The key thing to know about NCCs and NDAs is that they are becoming more common.
But this doesn’t mean you should just sign them on the spot.
It’s important to read and to understand the agreements – including the fine print. You want to ensure you don’t get in trouble simply because you didn’t bother reading the documents.
While it can mean a loss of a job opportunity to decline to sign an agreement, you shouldn’t get into a bad deal just to get a job. If you can’t negotiate the terms, it might be time to look for another job opportunity.
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