Non-compete agreement

What a non-compete agreement is

A non-compete agreement, sometimes called a non-competition clause or covenant not to compete, is a promise by one party, usually an employee or a seller of a business, not to compete with the other party for a set time and within a set area. In an employment setting, it typically stops a departing worker from joining a direct competitor or starting a rival business for a period after they leave.

The goal is to protect legitimate business interests, such as trade secrets, confidential methods, and close customer relationships, that a former insider could use against the company. A non-compete is different from a non-disclosure agreement, which protects information, and a non-solicitation clause, which stops someone from poaching clients or staff. Many contracts combine all three.

This is general information, not legal or tax advice. Rules vary by state and province, and the right choice depends on your facts. For anything important, check with a qualified professional.

When a non-compete is used

• Employment. Added to an offer letter or employment contract, often for roles with access to sensitive information or key clients.
• Sale of a business. A buyer does not want the seller to open a competing shop next door, so the sale agreement includes a non-compete.
• Partnerships. Departing partners may agree not to compete with the firm they leave.
• Contractors. Sometimes used with independent contractors, though courts look at these carefully.

What a non-compete agreement should include

A clear non-compete spells out exactly what is restricted and for how long. The core clauses are:

• The parties. The full legal names of the employer or buyer and the person agreeing to the restriction.
• The restricted activity. A precise description of the work or business the person cannot do, rather than a blanket ban on any job.
• The time period. How long the restriction lasts after the person leaves, for example a set number of months.
• The geographic area. The region where the restriction applies, which should match where the business actually operates.
• Consideration. What the person receives in return, such as the job itself, a signing payment, or the purchase price of the business.
• Carve-outs. Any exceptions, such as passive investment in a public company or work in an unrelated field.

What makes a non-compete enforceable

Courts do not enforce every non-compete. In places that allow them, a non-compete generally has to be reasonable, meaning it is no broader than needed to protect a real interest. Judges look at whether the time period and geographic area are limited, whether the restricted activity is narrowly defined, and whether the person got something of value in exchange. A ban that is too long, too wide, or that simply stops someone from earning a living is often reduced or struck down.

Location matters a great deal. Some states heavily restrict or ban non-competes for most employees, and enforcement rules can change. In Canada, courts tend to view non-competes with suspicion and enforce them only when a narrower non-solicitation clause would not protect the business, and some provinces limit them by statute. Because of this variation, the same clause can be valid in one place and unenforceable in another, which is why local advice matters.

How to write a non-compete agreement step by step

1. Name the parties. Use full legal names and the effective date.
2. Describe the interest you are protecting. Be specific about the trade secrets, client relationships, or goodwill at stake.
3. Define the restricted activity narrowly. Limit it to the work that could actually harm the business, not every possible job.
4. Set a reasonable time period. Keep it as short as fairly protects the interest.
5. Set a reasonable area. Match it to where the business competes, not the whole country by default.
6. State the consideration. Make clear what the person gets in return.
7. Add related clauses. Consider adding non-solicitation and confidentiality terms, plus what happens if part of the clause is found invalid.
8. Sign and date. Both parties sign, and each keeps a copy.

Alternatives to a non-compete

Because non-competes are hard to enforce in many places, businesses often rely on narrower tools that courts accept more readily. A non-disclosure agreement protects confidential information without limiting where someone can work. A non-solicitation clause stops a former worker from taking clients or staff, which is often the real concern. Strong confidentiality practices and clear ownership of work product can protect a company without a broad ban on future employment.

Non-competes when you sell a business

Courts treat a non-compete in the sale of a business very differently from one in an employment contract. When you sell a company, the buyer is paying for its goodwill, meaning its reputation and customer base, and a non-compete stops the seller from turning around and rebuilding the same business next door. Because the seller received real value in the purchase price, and because the two sides are usually on more equal footing than an employer and a new hire, these non-competes are generally enforced more readily and can be broader in time and area. If you are buying or selling a business, expect a non-compete to be part of the deal, and make sure the restricted activity, period, and area are written clearly so both sides know what was agreed.

What happens if a non-compete is too broad

When a court decides a non-compete goes further than needed, it does not always throw out the whole clause. Depending on the location, a judge may take one of a few approaches. Some courts will narrow an overly broad term, for example shortening the time period or reducing the area, and enforce the rest, an approach often called blue pencilling. Others will refuse to rewrite the clause and simply decline to enforce it, leaving the person free to compete. Because you cannot count on a court fixing a bad clause, it is safer to draft a reasonable non-compete from the start than to write an aggressive one and hope it survives. A severability clause, which says the rest of the agreement stands if one part is struck, helps protect the other terms.

Changing rules on non-competes

The law on non-competes has been shifting, and the direction is generally toward more limits on their use, especially for lower wage and rank and file employees. Several places have passed laws restricting or banning them, setting minimum salary thresholds, or requiring advance notice before an employee signs. Because these rules change and vary widely by location, a non-compete that was standard a few years ago may no longer be enforceable in the same form today. This is a strong reason to check the current rules where the employee works and to keep any restriction narrow, rather than relying on an old template.

Fill out and sign a non-compete online

You can complete a non-compete agreement on your computer without printing. Open our fill a PDF tool, add a non-compete template or your own document, type in the parties, the time period, and the restricted area, then download the finished file. Everything is processed in your browser, so the contract stays on your own device.

When it is ready for signatures, the sign a PDF tool lets each party draw, type, or upload a signature and place it on the page. For related employment paperwork, browse the form templates library.

Keep your agreements in one place

Businesses reuse the same agreements with new hires and partners. Create a free account on fillable.ca to save your filled non-compete, adjust the terms for each situation, and keep every signed contract organized in one spot.