If you’re an employer, non-compete agreements can be a helpful addition to the employer-employee relationship. Business owners are often in a position where they have to invest significant time and resources in training a new employee to perform a specific task. Further, these skills involve insider knowledge of the company and industry. Without a non-compete, an employee can use this information to hurt their former employer.
Texas Law typically disallows contracts that restrain free trade and commerce. Non-compete clauses in contracts restrict free trade and business. Fortunately, the Texas Legislature created a specific carve-out to make non-compete clauses enforceable in Texas so long as they are appropriately tailored. To craft an enforceable non-compete clause, business owners must know the answer to the question, How does a non-compete work?
What Is a Non-Compete Agreement?
A non-compete agreement is a clause in a contract that restricts an employee from competing with their employer after the employment relationship terminates. These contracts help ensure employers that an employee cannot use insider information, such as client lists and trade secrets, to give another company an advantage.
Counterintuitively, a non-compete clause can also help employees by opening up positions that otherwise would require too much insider knowledge. A carefully crafted non-compete will protect the employer while restricting the employee to the least degree possible.
Components of a Non-Compete Agreement
A well-tailored non-compete agreement is designed to meet the needs of a specific employer-employee relationship. Due to this requirement, most non-compete agreements should be individually crafted rather than plugged into a standard template. A successful non-compete clause should contain at least five necessary components.
Scope of the Agreement
A non-compete agreement must be limited in scope to be enforceable in Texas. To define the scope of a non-compete, the contract should specify the industry or industries covered. An even more straightforward practice is identifying competitors with whom the employee cannot work. The agreement can also define proprietary information, procedures, and practices that the employee should not use during the period the non-compete is in effect.
Where the Agreement Applies
Limiting the geographic area where the non-compete applies will increase the agreement’s enforceability. Some employers need a non-compete to cover only the geographic area immediately surrounding their place of work. Other companies compete at a national or even international level. In general, more geographically limited non-competes are easier to enforce.
Duration of the Agreement
A non-compete clause must have a specified and limited duration to be valid in Texas. A contract that affects an employee’s ability to find work in perpetuity will not be enforceable. It is best to tailor the agreement to the practical needs of the employer without putting an undue burden on the employee.
Who the Competitors Are
Defining who a company’s competitors are and the industry they compete in is an essential aspect of a good non-compete agreement. The contract should narrowly define the industries it covers. For example, a non-compete that tries to prevent a software engineer from working in the “tech” industry will almost certainly be unenforceable. Naming specific competitors to provide examples is a common practice.
Damages for Breaking the Agreement
It is a good practice to define the remedies an employer will seek if an employee breaches the non-compete clause. The damages the employer will seek should be tailored to the economic damage of a breach. Defining damages in the non-compete agreement itself can help an employer avoid the cost of proving specific damages in the event of a breach.
Legal Parameters for Non-Compete Agreements
In Texas, a non-compete agreement must be reasonable in duration, scope, and geographic area.
How Long Can a Non-Compete Last?
Courts sometimes enforce non-compete clauses with a duration of up to five years. However, durations longer than two years are usually enforceable only when they involve a key employee with access to the most critical customers and proprietary information. The duration of the agreement is situationally dependent. It is best to consult a business attorney to help determine the duration of a non-compete.
How High Can Damages Be?
The monetary payment for breaking a non-compete agreement can not be punitive. The damages specified in a non-compete should attempt to accurately reflect the damage done by a breach of the contract. The courts will look down on any damages clause that seems to be focused on punishing the employee rather than recovering just compensation.
The Curley Law Firm Can Help
If you have questions about non-compete agreements or any other business matter in Texas, The Curley Law Firm can help. We represent clients in a diverse set of litigation and transactional matters. At The Curley Law Firm, we know that crafting air-tight agreements is essential in preventing business disputes. Our client-focused, results-oriented approach drives success. Contact us now so we can help you successfully navigate your business’s legal needs.