What is a non-compete agreement?

A non-compete agreement is a contract that prohibits employees (and sometimes contractors) from competing with an employer in any way once they stop working for the organization.

Prohibited actions may include the following:

• Getting a Second Job
• Taking a second contract
• Starting a business in the same field
• Working within a certain distance from a particular location
• Working with some competitors

Note that the seller of a business can also sign this type of agreement with the buyer.

Non-compete agreements are often designed to help businesses maintain their market share. This is because they prevent employees and contractors from disclosing trade secrets to competitors or using their former employers' business relationships and skills to gain an advantage over them.

What is a non-compete clause?

A non-compete clause contains the same terms and serves the same purpose as a non-compete agreement. The only difference is that non-compete clauses usually appear as a clause within a larger business sales or  employment contract  , rather than being signed as a separate legal document just for that purpose.

Common Elements of a Non-Compete Agreement

Non-compete agreements are customized to the needs of each individual business, but they often have certain characteristics that apply to most clauses or contracts of this type:

• Competition: What types of businesses can be considered competitive?
• Scope: What specific types of work or activities is the former employee or business seller not allowed to engage in?
• Location: What are the exact geographic parameters in which the former employee or business seller must avoid competing?
• Duration: How long does a non-compete agreement last?
• Consequences: What happens if the employee or vendor violates the contract?

Including these elements gives business owners the best chance of enforcing the contract if they ever go to court.

Industries that commonly use non-compete contracts

Non-compete agreements are typically used in industries and sectors where businesses have a lot at stake if an employee works for a competitor.

Sales and service-based businesses

Employees in such businesses typically have to grow their clientele through marketing and building business relationships. If an employee takes their clients elsewhere or starts their own company using those relationships, it can really hurt the business.

Technology and manufacturing companies

These types of companies are most likely to be working with new technologies and products that others may not know about or have access to. Non-compete clauses ensure that product engineers and developers do not take those ideas and trade secrets to a competitor and deprive the business of potential market share.

Banking and Financial Institutions

Key employees in the financial industry often develop in-depth, specialized knowledge of a company's financial transactions, including investment strategies and key clients the company deals with.

Signing a non-compete agreement can prevent potential secrets from reaching other entities, which could help them get ahead in the market or strengthen their financial portfolio.

Health care

Doctors and nurse practitioners who need to increase their patient volume often sign non-compete agreements because they can be robbed of money if they leave the practice and patients follow them to a nearby facility.

Health care researchers also have these contracts so that they do not reveal their new discoveries or medical treatments to a competing laboratory or business.

Media and Creative

Media personalities often gain followers. If a person leaves a show or network to take their talents elsewhere, viewership (and therefore sponsor deals) may decline.

Additionally, people engaged in creative professions such as marketing may sign employment contracts with non-compete clauses to avoid sharing creative ideas and campaigns that might increase another company's revenue or help them gain a foothold in the market.

Benefits of Non-Compete Agreements

Although non-compete agreements are often seen as beneficial to employers, having one can benefit both parties:

• Protecting sensitive company information from being shared with competitors
• Encourage employers to invest in the professional development of employees to help them stay at the forefront of industry development and  increase their participation
• Encourage employers to trust employees with trade secrets and proprietary information
• Decreasing the number of employees  , which will reduce company costs and improve morale

With a non-compete agreement, employees can often enjoy longevity and trust, while employers feel comfortable about the legal protections they receive.

Drawbacks of Non-Compete Agreements

Non-compete agreements harm both businesses and employees:

• Businesses in this sector may lose out on top talent.
• Employees  may not be aware of a non-compete agreement as a  condition of employment until they accept the offer.
• Employees are usually not able to negotiate the terms of the agreement.
• Career development of employees, including those who do not know trade secrets, may be limited by not being able to work in their field for long periods of time.

After understanding both the benefits and disadvantages of non-compete agreements, it is important for companies to figure out if requiring one is the right move.

Are non competes enforceable?

There are no federal laws that govern whether non-compete agreements can be enforced in court. Instead, those decisions are left up to each individual state. While non-compete agreements are legal and enforceable in many states, there are some where they are not recognized or state law has deemed them unenforceable.

State Law

Some state laws completely prevent non-compete agreements and clauses from being enforced in court, while others limit their enforcement to only certain industries or situations.

California

California  Assembly Bill 1076  makes non-compete clauses illegal and requires employers to notify all employees that their contracts or clauses are void. The state has previously made any restriction on a person's ability to engage in a profession or trade, including employment references, unenforceable (with some exceptions). This law applies to remote workers regardless of which state their contract is signed in.

Colorado

HB22  declares that any restriction on a person's right to receive compensation for their labor is void, with certain exceptions. Employers also cannot require an employee to reimburse them for job training or education.

Airport

HRS 480-4  specifically prohibits non-compete agreements with respect to technology businesses. The law does not prohibit these agreements in other types of businesses.

Minnesota

In 2023, Minnesota  introduced and passed SF 405.  This law makes non-compete agreements unenforceable for employees and independent contractors.

North Dakota

North Dakota has a longstanding law that states non-compete agreements are not enforceable in court. Although court cases have tried to challenge this law, they have been unsuccessful.

oklahoma

With some exceptions,  Oklahoma law  allows former employees to engage in the same business as their former employer, as long as they do not try to lure away their customers. The law also declares that non-compete agreements are ""void and unenforceable.""

Utah

Utah law  allows non-compete agreements to be enforceable for a period of up to one year.

Proposed FTC non-compete restrictions

On January 5, 2023, the Federal Trade Commission proposed a rule that would prohibit employers from requiring or entering into non-compete agreements with employees. This rule would preempt all state laws, which provide even more protection to employees.

This proposed rule would only apply to the employer-employee relationship and would not apply to those buying or selling a business entity. This is because it is intended to increase the earning potential of employees affected by non-compete agreements.

It would not ban non-solicitation, confidentiality, and concurrent employment restrictions. It would also not apply to businesses that  are not subject to the FTC Act  , such as air carriers, banks, insurers, and nonprofits.

How non-compete restrictions can affect existing agreements

The FTC's proposed non-compete ban would apply to current and former employees and would void all non-compete contracts. Additionally, employers would be required to notify all current and former employees that their contracts have been voided, provided they have up-to-date contact information for those former employees.