Non-Compete Agreement Basics

Non-Compete Agreement Basics

Simply stated, a non-compete agreement is an agreement where one party agrees not to compete with another party within a certain business or industry. A non-compete agreement is usually found within employment contracts where the employee agrees that she or he will not start a business to compete with the employer or obtain employment from one of the employer’s competitors. The purpose of a non-compete agreement is to protect an employer from an employee having an unfair advantage due to the employee’s employment with the employer. For example, a salon hires a hair stylist. The hair stylist works for the salon, building a client base as well as serving the salon’s existing client base. After a few years, the hair stylist leaves the salon and sets up her or his own shop, just across the street and takes all of the salon’s clients. A non-compete agreement is designed to restrict or limit the hair stylist’s ability to do this.

Most states, including Michigan, honor non-compete agreements, as long as they are reasonable in geography, duration, and employment scope. Even if a non-compete agreement is held to be unreasonable, courts may alter the provisions so they are more acceptable. Using the hair stylist example, if the non-compete agreement restricted the hair stylist from opening a shop within 500 miles of the salon, a court may reduce that to 50 miles, but otherwise leave the non-compete agreement intact. Whether a non-compete agreement is declared unreasonable or overly broad is very fact specific. However, the shorter the non-compete agreement is in effect, the smaller the geographical area and more narrow line of business in which the employee is restricted, the more likely the non-compete agreement will be enforced by the courts.

For more information about non-compete agreements and other employment and contractual issues, please contact us.