Penalties for Businesses That Break Non-Compete Contracts

We have talked about some of the reasons that entrepreneurs should never work without a contract. However, it is also important to remember that your clients, suppliers and other businesses may also have contracts that they expect you to sign as well. One contract you may be expected to sign is a non-compete contract.

A non-compete agreement is a legal contract that prevents employees from working with competing companies for a certain period after leaving their job. The FTC estimates that 30 million people are held to non-compete contracts, including many business owners. But what happens if you break one?

While the specifics can vary based on the terms of the agreement and local laws, there are common consequences that may follow. Check them out before consulting your non-compete agreement attorney.

What Is a Non-Compete Agreement?

Non-compete agreements are often used by companies to protect their business interests. These agreements are designed to stop employees from taking sensitive information, client relationships, or trade secrets to a competitor. Most non-competes have clear guidelines on where you can and cannot work after your employment ends. You need to be aware of these rules so that your business doesn’t get sued.

These agreements can last for a few months to several years, depending on the company and the nature of the job. They usually apply to specific geographic areas and certain industries or sectors. But what happens if you break the terms of the agreement?

Consequences of Breaking a Non-Compete

Breaking a non-compete agreement may lead to legal action from your former employer. Companies can sue you for breach of contract if they believe you are violating the agreement. A lawsuit could result in financial penalties or a court order to stop you from working for a competitor.

In some cases, the employer might ask for an injunction. This is a court order that prevents you from continuing to work in the role or industry that violates the agreement. If you fail to comply with the injunction, you could face further legal action. You can’t be overconfident about the new FTC ban on non-compete agreements, since it has been struck down.

Financial Penalties

Many non-compete agreements include a clause that outlines financial penalties if broken. These penalties can vary widely but may involve paying back some or all of the compensation you received or, in some cases, damages related to the breach. The goal of these penalties is to compensate the employer for any potential losses that occurred due to your breach of the agreement.

Impact on Future Employment

Breaking a non-compete agreement could also affect your future job prospects. Employers often check candidates’ employment history, including whether they’ve ever been involved in legal disputes or breaches of contract. If a potential employer finds out that you’ve violated a non-compete, they might reconsider your application or offer a less favorable position.

Furthermore, some industries and sectors are tightly connected. A breach could limit your options, especially if you work in a niche market with only a few employers. This restriction could make it harder for you to find a job in your field.

How a Court Decides the Outcome?

If your former employer takes you to court, the judge will review the non-compete agreement to determine if it is reasonable. The court will consider factors like the duration of the agreement, its geographic scope, and how it affects your ability to earn a living. In some cases, a judge might find that the terms are too broad or unreasonable, in which case they might reduce the terms of the non-compete or void it altogether.

However, if the agreement is found to be fair and legally binding, the court may enforce it and require you to abide by the restrictions. This could mean stopping your current job and possibly paying damages to the employer.

Negotiating the Terms of a Non-Compete

If you are concerned about the terms of your non-compete agreement, it’s essential to try to negotiate before signing it. You might be able to ask for a shorter duration, a smaller geographic area, or broader exceptions to make the terms more reasonable. Many employers are willing to negotiate, especially if the terms seem too restrictive.

If you’ve already signed a non-compete and are thinking about leaving your job, consider consulting with a lawyer. They can review the agreement and help you understand your rights and options.

Can You Break a Non-Compete?

While breaking a non-compete is not impossible, it comes with risks. The legal, financial, and professional consequences can be severe, so it’s always best to fully understand the terms of the agreement before making any decisions. If you believe the non-compete is too restrictive or not enforceable, legal counsel can help you navigate your options.

In short, violating a non-compete agreement can lead to lawsuits, financial penalties, and difficulty finding future employment. If you’re uncertain about the agreement, it’s wise to seek legal advice to understand the full scope of potential consequences. By being informed, you can avoid costly mistakes that might affect your career in the long run.