Why Use Non-Compete Agreements? The Pros and Cons of NCAs

Pros and Cons of Non-compete Agreements

Competition is a critical business issue, and ensuring fair competition is one of the key points. Employers often use restrictive instruments against competition from their employees. Such instruments include signing a non-compete agreement (NCA). A non-compete agreement is a document that limits the ability of an individual or legal entity to compete with another party. Most often, the document is signed by future employees when hiring.

Our today’s article will help you answer the question of why such a document is needed. We will also consider the advantages and disadvantages of this document from two points of view: the employer and the employee.

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What Is a Non-Compete Agreement?

All employees have varying degrees of access to confidential company information. Someone has access to customer databases, others to secret product formations, and so on. To prevent the employee from using this information in work for a competing company, a non-compete agreement should be signed.

In this case, the employee has no right to use the data obtained during work to create a similar business. They also cannot be hired by a competing company. The agreement should limit a clear period of its validity.

A company may ask both its employees and contractor companies or other third parties doing business with it to sign this document.

Why Use Non-Compete Agreement?

Employers should use such a document to protect themselves from competition from:

  • former employees
  • contractor companies

This is done when these individuals have access to unique data that they can use to create a competing business or work for a competitor. Therefore, the document restricts working in such companies for a certain period in a specific area.

Most often, such agreements are used in three industries:

  • Financial industry
  • Insurance companies
  • IT sphere

In finance, hedge fund managers, asset firms, and other investment-related companies are usually asked to sign NCAs. The reason is that these employees have extensive financial knowledge and access to confidential information that can be used against the current employer.

Insurance firms thus seek to protect their customer databases. And in the IT field, such agreements are directly related to product developers.

Companies use this agreement to insure themselves against competition from former employees. But the ban on competition has its term and geographical limit.

The Pros and Cons of Non-Compete Agreements

The non-compete agreement have several advantages and disadvantages. And at first glance, it seems that all the benefits are only on the employer’s part. But that is not true. First of all, we will consider the document from the employee’s point of view and then move on to the employer’s point of view.

The Employee Perspective

Let’s start with the positive aspects for employees:

  • If you are lucky, the agreement may include a clause to pay you some bonus for refraining from the competition. Such a point is not always there, unfortunately for many employees.
  • You can insist on canceling the agreement if you are fired from your job. This is possible if you initially include this clause in your contract.
  • The agreement is valid only for a predetermined period and only in a specific geographic area. During the negotiation process, you can try to make these conditions more acceptable to you.
  • Your willingness to sign such an agreement will raise you profitably in the eyes of the employer. Also, employers are usually not in a hurry to fire employees who signed such documents but do everything to keep them in the company.

Now let’s move on to the disadvantages of signing NCAs for employees:

  • It hinders your search for further work if you decide to leave this company or if you are fired. It will also be very difficult to open a business in the same industry, at least for a certain time and in the same area. It is worth thinking about your prospects before accepting such a proposal. It may be more profitable for you to refuse and continue looking for a better deal.
  • It is best to get third-party legal advice before signing an NCA. This can mean additional costs that employees have to cover out of their own pockets.

As you can see, each case can be unique, and you should not be pessimistic about signing NCAs. It is worth carefully studying the proposal and weighing the pros and cons.


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The Employer Perspective

From the point of view of the employer, everything also cannot be univocal. It is necessary to consider the situation from all sides.

Let’s start with the obvious advantages that employers can get from NCAs:

  • The company protects its unique information and trade secrets, although only for a certain period.
  • The company ensures the protection of customer databases. An employee cannot use customer lists after leaving the job.
  • After leaving, key employees will have practically no chance of competing with the company: neither as an employee of a competing company nor as a founder of their own company.
  • The likelihood of an employee leaving the company is reduced, which allows the employer to protect their investment in training this employee.

With all this, even for the employer, the use of this document should be considered from two sides.

Let’s move on to the disadvantages:

  • The use of such an agreement may incur the risk of litigation. For instance, if the agreement’s time frame or geographic scope is too big, the employee can sue the company. At the same time, the employee will have a chance to win in court.
  • Not all potential employees are ready to sign such a document, which reduces the number of truly valuable applicants for the position and reduces the company’s attractiveness in the eyes of applicants.
  • If a company already has confidentiality clauses, NCAs may duplicate the restrictions. This should not be done because it will not add more protection to the company, but it will add stress to the employees. They can claim compensation for signing such documents.

The agreement must be drawn up fairly for the employee. Otherwise, at the risk of litigation, the court may side with the employee and impose fines on the company. The amounts can be impressive.

To Sum Up

It does not matter whether you are an employee or an employer; signing non-compete agreements should be taken seriously. Weigh the pros and cons and try to understand if you need this document. It is not superfluous to get qualified legal assistance in this matter. If you are interested, we also recommend reading about the study of this issue, which the White House carried out under President Obama.