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Should You Have a Noncompete Agreement?

Author: Katie Truesdell Date: February 26, 2014

To answer that question, a small business owner must ask three other questions first.

Noncompete agreements—and lawsuits resulting from breaches of them—are becoming more prevalent in the workplace, according to The Wall Street Journal.

For employees looking to leave a corporation and launch their own business, these noncompete agreements can have a stifling effect on entrepreneurial spirit. But for small business owners who have already begun such endeavors, should they have noncompete agreements for their employees?

The agreements should put small business owners at ease knowing intimate knowledge of the business is safe from competitors, says business consultant and speaker Ron Hequet in Weatherford, Texas. To help determine if the need is there, ask yourself:

Will you be making a proprietary investment in your employees?

If you will be providing specialized training or confidential information that is not publicly available and is unique to your business, and if your business would suffer economically if a competitor used that training or information, consider a noncompete agreement, says Weatherford.  

Do your employees have access to proprietary information that could harm your business in the hands of a competitor?

Proprietary information—which is the property of the holder and is not public knowledge—could include historic/current financial data, sales records, operating data, budgetary profit and expense information, business plans, products, processes, technical documents, purchasing procedures, vendor information, pricing policies, employee pay rates, monetary bonus systems, existing/prospective customer lists and marketing strategies.

Do your employees establish close customer relationships?

If an employee has the ability to bring clients with him or her to a new company, consider a noncompete agreement, says lawyer Dianne G. Moretzsohn, who counsels small and midsize businesses on employment law and litigation.

Nina B. Ries, principal of Ries Law Group in Santa Monica, Calif., who has represented many small and midsize businesses in a variety of industries, recommends considering any potential pitfalls before making a final decision: state laws affecting enforceability, what you’ll do if an employee refuses to sign, whether a nondisclosure agreement might better suit your needs, and the potential effect on staff production, support, loyalty and morale.

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