Non-Compete Contracts and Whether or Not You Should Use Them

With businesses constantly wary of losing staff to rival companies, many are now enforcing what's known as non-compete contracts. This is where new employees sign a contract that states they cannot contact a client of their old company to take them to their new place of work. It usually applies for anywhere between 2-3 years from the date the ex-employee leaves the company. However, whilst it's an excellent way for business owners to protect not only their clients but also their intellectual property, it can also have its negative sides.

The Pros of Non-Compete Contracts
The obvious benefit of having a new employee sign a non-compete contract is the protection it offers you and your business. Say you have an excellent sales person who accounts for over half of your annual sales alone - there's a reason they have such a high success rate, and a lot of it has to do with the relationship with the client. If that same salesperson was to leave your company, there's a strong possibility that they could take their best clients with them, which could prove extremely costly for your company. Having them sign a non-compete contract will negate this possibility.

The other benefits of having a non-compete contract is that they can save you a fortune in legal fees if there was a case of an ex-employee stealing your best clients. Since they signed the contract in question, any defense they would have had would be null and void, as they would be in breach of contract.

The Downside
While there's no question that a non-compete contract can offer you a high level of protection when it comes to your core business, they can also have the opposite effect as well. One of the biggest downsides of enforcing these types of contracts is that it can actually put people off wanting to work for your business.

With employees changing jobs as frequently as they do in today's job market, anyone looking at a company that has a non-compete contract in place might actually prefer to look elsewhere. This is particularly true if it's a sales role that you're looking to fill, with many salespeople preferring to build from an old client base as opposed to starting from scratch.

They can also be difficult contracts to enforce, even in a court of law or employment tribunal. In the US especially, there are many states that won't officially recognize a non-compete contract. And although a decision may go your way in court, the cost of bringing it to trial in the first place can be an expensive endeavor.

The Alternative
Since there is no clear-cut strength and weakness of a non-compete contract, many companies are now looking at alternatives. One of the most popular is the "300% Contract". Instead of a new employee signing a non-compete contract, they will agree instead that should they leave and take any of your clients with them, they will have to pay you compensation to the value of 300% of that client's annual spend with your company.