What Is a Non-Compete Agreement?

What Is a Non-Compete Agreement?

Let me explain what a non-compete agreement is—it's a legal contract that stops you, as an employee, from competing with your employer after you leave the job. It often includes rules against sharing company secrets or proprietary info.

These agreements are there to protect the company's spot in the market by keeping employees, contractors, or consultants from jumping to or starting a rival business for a set time. The time frame and area covered can differ, but the goal is to guard the employer's edge in the industry.

Important Update on Non-Competes

You need to know that on April 23, 2024, the Federal Trade Commission (FTC) put out a final rule banning non-compete clauses. This rule is meant to protect your freedom to switch jobs, boost innovation, and help new businesses get started.

The FTC first proposed this ban on January 5, 2023, and they think it will help about 30 million people. Under the rule, most existing non-competes for workers won't be enforceable anymore, though ones for senior executives might still hold. Companies can't make new non-compete agreements for any employee, even executives.

Key Takeaways

Non-compete agreements are contracts that limit you from competing with your old employer after leaving, which helps protect trade secrets and the company's market position. The FTC's final rule from April 23, 2024, bans most of these clauses to improve job mobility and innovation for workers like you.

Enforcement differs a lot by state—some, like California and Oklahoma, ban them completely. Remember, non-competes aren't the same as non-disclosure agreements; non-competes restrict your job options, while NDAs just protect confidential info. These agreements aim to shield business interests, but they can cut into your job prospects and bargaining power.

Validity depends on where you are, and sometimes the old employer has to keep paying you a base salary during the non-compete period.

How Non-Compete Agreements Function in Employment Contracts

You usually sign a non-compete when you start working for an employer, and it gives them control over what you do even after you leave. The clauses say you won't work for a competitor, no matter if you quit or get fired. Sometimes, it even stops you from taking a job that wouldn't involve sharing secrets.

Contracts might specify how long you're bound, the areas where you can't work, or the markets you can't enter. You might hear them called covenants not to compete or restrictive covenants. Essentially, they prevent you from using what you learned to start a rival business or help a competitor, keeping the employer strong in the market.

Fast Fact

Non-competes should protect both the employer's and your best interests as the employee.

Components of a Non-Compete Agreement

Non-competes aren't standardized, but they often have similar parts. For duration, they cover set periods like six months or a year—long ones can be too restrictive and keep you from finding work. Geography factors in by banning you from certain areas for a time.

Scope defines the work or services you can't do, including unique info, techniques, or practices proprietary to the business. Competitors get defined in the agreement, giving a sense of the industry or businesses you agree to avoid. Damages outline what the employer can claim if you break it.

Situations and Reasons for Implementing Non-Compete Agreements

Businesses use these to guard intellectual property, trade secrets, procedures, and their competitive edge. Without them, ex-employees could share info with rivals, costing the company its advantage. You might even start your own business using what you learned, pushing the original firm out of the market. That's why non-competes are key in hiring for many companies.

Common Industries With Non-Compete Practices

You'll see non-competes a lot in media—for instance, a TV station might worry a popular meteorologist could draw viewers to a rival if they switch locally, which is often seen as reasonable. They're also common in financial services, corporate management, manufacturing, and information technology.

Fast Fact

Enforcement varies by state, so consult an employment lawyer about non-competes where you live.

Legal Aspects and Variability of Non-Compete Agreements

In the US, non-competes are handled at the state level, with wide differences in enforcement and laws—many states have updated their rules recently. North Dakota and Oklahoma don't enforce them at all. California doesn't recognize them, and employers can get sued for trying to enforce one after you leave.

Hawaii banned them for high-tech firms in 2015. Utah limited new ones to a year in 2016 and revised further in 2019. Most states require that non-competes aren't too extreme in time or area and don't overly block your ability to find work, but interpretations vary on what's too demanding.

Comparing Non-Compete and Non-Disclosure Agreements

Non-competes differ from non-disclosure agreements (NDAs), which usually don't stop you from working for a competitor. NDAs just prevent you from sharing what the employer sees as proprietary or confidential, like client lists, tech details, or upcoming products.

Pros and Cons of Non-Compete Agreements

On the pros side, they protect trade secrets and proprietary info, keeping employees from sharing it with competitors—the agreements need to be fair to both sides. They can inspire innovation by containing ideas, pushing rivals to create their own. Employers use them to find workers committed long-term or trusted with key info. They also cut turnover by limiting options and may lead to more training for employees.

For cons, they weaken your bargaining power by blocking better-paying jobs or negotiations. The wait time can be long, making it hard to find work in your field, and some leave the industry entirely. They offer few social benefits, mostly helping the company. Plus, they can restrict workers who don't even have trade secrets—reports show over half under these agreements don't, unnecessarily limiting their options.

How Long Do Most Non-Compete Agreements Last?

Most last six months to a year, though longer ones exist—but businesses struggle to enforce long terms legally. Some states won't enforce them, and a few don't see them as legal at all.

How Do I Get Around a Non-Compete Agreement?

If you signed one and break it, you could get sued. State laws, which vary, determine if it's enforceable or not.

Are Non-Compete Agreements Really Enforceable?

It depends on state laws for legality and enforcement. Law firm Beck Reed Riden LLP has a survey of states' positions on non-competes, including protected interests, standards, and exemptions.

The Bottom Line

Signing a non-compete might not always benefit you, but it does help your employer. Before you sign, talk to an employment attorney to understand your state's laws—it could make finding a new job in your field tough if you leave. Not every state upholds them, but some do, so know how it might affect you if you quit or break the agreement.