Protecting Your Company Through Noncompete Clauses

by Thom Tracy

2 min read

An important part of growing your small business is having staff on hand with the expertise of your industry. But hiring employees always comes with the risk that they will leave your company, capitalize on what they’ve learned, and enter into a competing business. To prevent this from occurring, you can hire people under the condition they agree to a covenant not to compete.

Covenant Not to Compete

A noncompete clause, also called a covenant not to compete, is legal documentation that puts limits on what employees of yours can do if they leave your company. This form is usually signed once the employee is hired. To make it clear exactly what your prospective employee is signing, it should be an entirely separate form from every other hiring document.

Phrasing of Clause

Because a covenant not to compete is legally enforceable, you must make sure the wording is clear and understandable. A clause should outline the amount of time the covenant lasts after an employee leaves. For example, a covenant may explain that an employee cannot work for a competing company or at a certain location within two years. Also, consider listing specific companies if there are primary businesses that would not be allowable. The covenant should include the date, signature of the employee, and the legal result of what will happen if your employee does not follow the agreement.

Legal Rights

If an employee does not abide by a covenant, you have the legal right to collect damages. The covenant not to compete should outline what will happen to former employees if they leave and being working under conditions that you have restricted. Keep in mind that it is very common for noncompete clauses to be dismissed by the courts. Canadian courts tend to be stringent when evaluating the restrictiveness and reasonableness of your policies. In general, they tend to favor the employee side by protecting a worker’s rights to pursue employment in the trade of their choice.A covenant not to compete can also be voidable in a few situations. A covenant not to compete is usually only enforceable if an employee willingly leaves. If employees are fired, the clause is usually terminated. They can also occasionally buy themselves out of the contract. Although a covenant not to compete is drawn up once an employee is hired, it can also be willingly terminated if both you and your employee agrees to terminate the contract.

Benefits of Covenant

The greatest benefit of a covenant not to compete is the protection of your intellectual property. Anything your company invents, creates, or develops remains the property of your company. An employee cannot take the competitive advantage. This type of agreement also helps retain employees. Because an employee cannot leave and take certain trade secrets to other companies, your employees are more likely to stay with your company. Your customers are more likely to be more loyal toward your business because your products and services cannot be similarly replicated by employees who have quit.Adding this document to your hiring paperwork will protect your company in the long run. Consider having employees enter into agreements not to compete to make sure your company’s property remains with your business.

References & Resources

Related Articles

Should Your Nonprofit Organization Accept Restricted Gifts?

As your nonprofit grows and begins to accept donations, it’s important to…

Read more

Checklist Before Leaving Your Job to Become Your Own Boss

So you’re thinking of quitting your job to become your own boss. In other…

Read more

What’s Changed in the New QuickBooks

The new QuickBooks Online bookkeeping software has gone through quite a few changes. As…

Read more