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What Do Non-Compete Agreements Actually Mean in Outsourcing

  • Non-compete contracts are essential in the outsourcing industry for protection of intellectual property and trade interests and employee retention

Working environments are becoming increasingly scattered, and with outsourcing and offshoring becoming an essential rule of business, non-compete agreements are becoming more important than ever before. These are covenants that prevent employees or trading partners from entering into business relationships with people or companies dealing in similar trades. These are important to prevent divulgence of trade secrets, tricks, and resources among competing firms or businesses. There are critical, all the more, in scenarios where a company offshores some of its critical business operations to an external individual or firm.

Non-compete agreements in project outsourcing.

What are non-compete agreements or contracts?

Say you were a technology company and developed an important tool to handle sales inventory. Or you were a software development firm working for a publishing house and developed a tool that fetches bibliographic information for references in a manuscript. Now, consider that you hire a third-party implementer to deploy these systems successfully. How vulnerable do you think the tools are to be used, or worse to be sold, by the third party implementer to other competing firms? The answer is VERY!

Such vulnerability can increase multifold in an offshoring environment, i.e. when you hire an independent contractor that’s based in a foreign country. Monitoring an independent contractor’s activity is not feasible, nor, strictly speaking, ethical.

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This is where non-compete contracts come in to save the day. While it is not possible, nor ethical, to force individuals or independent business entities not to quit working with you, it is possible to prevent them from using your business’ confidential information and trade knowledge they had access to while working with you to the benefit of other companies they might work for in the future.

A non-compete agreement, between an employer and an employee or contractor, is a legally binding agreement that prevents the contractor from working for another employer competing with their former employer after the employment or contract relationship has terminated. Such an agreement is usually limited to a predetermined period of time and (less frequently) a specific geographical region. 

The non-compete agreement is aimed at preventing an employee from terminating employment with an employer and taking a new position, with a competitor, where they can utilize any confidential information obtained on the previous job.

Non-compete agreements not only help employers protect their trade secrets, but are also used as a talent-retention tool. They help employers benefit from their investment in training and development by ensuring valuable employees are deterred from quitting.

What should a non-compete agreement include?

Non-compete agreements should be designed such that they are fair for both parties and uphold equity between the two. For a non-compete agreement to be legally binding, it should clearly indicate:

  1. The date the agreement becomes effective.
  2. The reason for enacting the agreement.
  3. The specific dates and geographical boundaries within which the employee will not be permitted, by law, to work in a competitive position.
  4. The benefits received by each party for agreeing to abide by the contract.
  5. Specifications of the non-compete compensation for the employee entering a non-compete contract. An employee should, ideally, receive compensation for not competing or not working for a competing enterprise
  6. Punitive measures to be taken against the party violating the non-compete agreement.

Non-Solicitation Agreement

A non-solicitation agreement might sometimes be included in a non-compete contract for IT outsourcing. A non-solicitation agreement, as the name suggests, prevents an employee from using a company's clients, customers, and contact lists for personal gain, not only as long as the employee is employed by the company, but even after leaving it. Since, despite not using the current employer’s intellectual property and trade secrets, an employee might try to move clients from the current employer to their own enterprises or interest, such an agreement becomes a significant part of a comprehensive non-compete contract.

The significance of non-compete agreements in outsourcing

Outsourcing has long become an essential business process. Several important business processes are delegated to independent contractors to save cost and resources. In such a scenario, non-compete contracts become essential to ensure one company's resources are not divulged to independent contractors and to other companies the contractor might work with in future. This could include protection of IP rights, permanent establishments and transfer pricing issues, and employment laws. 

For an IT company,  intellectual property, such as copyrights, trade secrets, inventions, ideas, formulae, source and object codes, know-how, improvements, etc., is the most important asset and must be stringently protected by the outsourcing/offshoring contract. A non-compete agreement ensures such measures are in place. 

It is also possible that a company to which a certain business process has been outsourced to by a certain company, say company A, is doing business with other competing companies, which might benefit from the resources of company A. Since often these companies to whom work is outsourced to are offshore, monitoring them may not be possible. In such a scenario, having efficient non-compete contracts in place and enforceable facilitates smooth, fair business functioning and protection of interests of the various parties involved in such contracts.

How Enforceable are non-compete contracts

Non-compete agreements do make a lot of sense when applied to senior employees- partners, executives, senior officials. These are the people who are, truly, in possession of trade secrets and knowledge that the agreement seeks to protect. However, extending such agreements to entry-level workers or other, not very senior, employees can be tricky. 

Similar to company-specific laws, it’s often difficult to draw a line between a non-compete agreement being enforceable and being unreasonable. To decide whether a non-compete agreement is enforceable or not, several things need to be considered: time and spatial restrictions, employee rank, and industry type etc. The enforceability of a non-compete agreement also depends on whether or not it is reasonable, and reasonability is determined by courts on a case-by-case basis. Different countries have their own laws regarding non-compete clauses.

Usually, to be enforceable, non-compete agreements should:

  • Have reasonable time restrictions (generally less than one year)
  • Be limited to a certain geographic area (specific cities or counties, rather than entire states)
  • Protect certain employer interests, such as trade secrets, confidential business information, and the company’s relationship with customers, clients, and vendors (including market position and reputation)
  • Should have provision for benefit (additional compensation, stock options, acceleration of benefits, etc.) in return of agreeing to not work for a competitor

Other than this, to be enforceable, non-compete agreements should be industry specific. For example, a newspaper columnist could be barred from working for another local newspaper, but not writing books, even though the same skills are used in both.

Non-compete Agreements (NCAs) Versus Non-Disclosure Agreements (NDAs)

Non-disclosure agreements (NDAs) are more commonplace than non-compete agreements. An NDA is a contract signed between two parties, one working for another, wherein the working party promises to keep privileged information private. This information could include trade secrets, important formulas, intellectual property, etc. pertaining to the employer. An NDA ensures that the company can trust a prospective employee or offshoring firm, with the latter being liable to pay damages in case it breaks the trust.

In contrast to non-disclosure agreements, non-compete agreements can be very dictating and, in some cases, downright impractical.This is because while NDAs prevent an employee or offshoring contractor from sharing confidential information or resources, NCAs prohibit them from working for any other competing business altogether. This could entail restricting an employee or a third-contractor from working for anyone else, thus, sort of, hand-cuffing them to your company. For example, an IT engineer signing an NCA could be prohibited from not just working for another company (regardless of whether that works on a similar/different project/platform), but also from starting his own company!

Thus, in real-world terms, NCAs are much more practical, applicable, and enforceable when the stakes are too high. Examples of scenarios where NCAs could be successfully implemented are international sports persons, actors, etc. (where huge amounts of money are involved) or scientists/engineers working on top-secret government projects (where security is a major concern). 

On the other hand, for regular situations, such as employment, outsourcing, offshoring etc., NDAs are much more useful and amicable. Employees and companies are more likely to readily sign NDAs than NCAs, because it gives them the opportunity to utilize their potential to the maximum, as long as they do not indulge in sharing secrets and confidential information.

Evon’s Policy

Evon Technologies cares for its clients and believes in upholding the trust they put in us. We understand the sensitivity of the information our clients trust us with and our reputation as reliable software development company in India.

As part of our privacy and confidentiality policy, we sign non-disclosure agreements with all our leads, even before they become our clients. The agreements are necessary to protect the information and plans that these prospective clients might share with us. These NDAs ensure our leads are at peace while negotiating further business requirements and processes with us. 

Once a project has been finalized and a lead has been converted into a client, sometimes, we might include NCA clauses in our contract, depending on the project requirements. Usually, this happens when a project is too expensive, sensitive, or the client, in particular cases, demands such an obligation. 

With our dedicated approach towards protecting the interests of our clients, you can be assured that when you choose to partner with us, you choose to  partner with the best! 

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