Non-disclosure agreements and non-compete agreements are both legal instruments that are regarded as restrictive covenants that limit what a person can say or do under certain scenarios. Restrictive covenants are designed to prevent an employee or individual associated with a company from revealing certain information about that company to competitors or leaving the company and conducting business in direct competition with it.
These restrictions are necessary to prevent financial damage from occurring to a company should one of their employees utilize proprietary information obtained from the company to compete with that company or give assistance to their competition. There are mainly two different types of restrictive covenants that can be employed by companies and it is important to understand the differences.
The non-compete agreement is utilized to prevent an employee from leaving a company and forming their own rival company in close proximity to and in direct competition with their former company. Non-compete agreements can be stand alone, or they can be clauses that are inserted into a larger overall employment agreement.
The non-compete agreement generally restricts an employee from setting up a similar business within a certain distance of the company and within a certain amount of time from the employee's separation from the company. As an example, a company could prevent an employee from setting up their own business within 25 miles of their location for one year.
Non-compete agreements and clauses can be useful in deterring employees from directly competing against their parent company, but they are not always enforceable. Many states have concluded that non-compete agreements restrict free trade and have refused to enforce them. However, if monetary compensation is offered and accepted as part of the non-compete agreement, the courts can take a different outlook on the validity of the contract because the employee has been financially compensated not to start a business within a certain distance and time of leaving the company.
A non-disclosure agreement is also known as a confidentiality agreement and it restricts the employee or independent contractor from disclosing any sensitive information they obtain in the course of their employment. Non-disclosure agreements help companies keep information that is vital to their market position and competitive advantage from falling into the hands of their competition to be used against them.
Many firms specialize in proprietary data and technology that took a great deal of effort and hard work to obtain, and this effort is the reason they enjoy their position in the marketplace. These companies want to prevent their competition from easily obtaining the benefits of their efforts by simply hiring away employees with critical knowledge of their operations.
While companies cannot prevent other businesses from hiring their employees, the non-disclosure agreement is very effective at preventing employees of a company from using proprietary information as a bargaining tool for recruitment from competing firms. The non-disclosure agreement legally prevents an individual from disclosing vital information obtained while in the employment of the company, thereby deterring other companies from hiring them solely for that benefit.
Companies can hire the worker because of their talent, but not for their specific knowledge of their former company. Unlike non-compete agreements, non-disclosure agreements are very enforceable and can have severe penalties for individuals or companies that violate the terms of the agreement.
Both the non-compete and the non-disclosure agreement serve to restrict the ability of an employee to harm their company should they decide to seek financial gain elsewhere. These restrictive covenants are necessary in an ever-evolving business world where information security is becoming more vital to the success of companies. In today's business climate, having a slight edge over the competition can mean all the difference in the success or failure of the company, and preventing leakage of vital information is critical to that effort.