Noncompete Agreements & Employment Agreements: One Agreement or Two? An Employer’s Perspective
In the interest of simplicity and ease, small businesses often include noncompete and other restrictive covenants together with general terms of employment in one agreement. This approach seems simple enough, and it may be more palatable to employees. But there are important considerations which favor the employer’s use of two separate agreements, despite the added complexity.
Separating restrictive covenants from the main employment contract allows for more focused negotiation on the specific terms of the restrictions without involving and detracting from compensation and other terms of the employment agreement. This can be helpful in reaching an initial agreement on the specifics of the noncompete and in resolving post-separation disputes.
When a restrictive covenant is included in the employment agreement, an employer’s breach of the employment agreement may discharge the employee from further obligations under the noncompete clause—absent language to the contrary. Unfortunately, inclusion of such contrary language is often forgotten when the contract is drafted. As a result, the employer’s alleged breach has become a common defense to enforcement of noncompete provisions. This can result in prolonged litigation and prevent enforcement of an otherwise well-drafted noncompete provision.
Where there is one agreement, then the entire agreement becomes public when filed in court, as required, to support an action for breach of contract. This allows competitors and others to clearly see not only the employer’s strategic restrictive covenants but the employer’s compensation paid and other terms offered to hire and retain valuable employees, along with any other contractual information that the employer might prefer to keep confidential.
And because restrictive covenants require court action for enforcement, anything else included in a singular employment agreement is then limited to court enforcement—absent language to the contrary, language often forgotten. Such language might require a breach of contract claim on the remaining terms of employment to be determined by arbitration. An arbitration provision allows parties greater privacy and control over the controversy than a public courtroom will. And the clearest way for an employer to limit that forum is by having two separate agreements.
From an employer’s perspective, noncompete provisions and other restrictive covenants should generally be addressed in a separate agreement, not in the main employment contract, as this separation provides a better chance of reaching and enforcing the agreement and doing so with more ease.