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Updated: March 17, 2023
According to an Economic Policy Institute survey, roughly half of US employers require at least some of their employees to sign a noncompete agreement. Although this makes up a significant number of people in the workforce, asking employees to agree to a noncompete (and the terms it spells out) is not standard practice across all industries. So how do you know if your organization needs to use them?
If you’ve ever wondered how a noncompete agreement might protect your business interests or prevent proprietary information from being shared with a competitor, having a basic understanding of how they work (and their limitations) is a good place to start.
Furthermore, it remains to be seen how the White House’s executive order aimed at limiting noncompetes in the workplace will affect businesses that regularly use them.
So, in this overview for business owners, we’ll talk about what a noncompete is, why employers use them, and how to make sure yours is reasonable.
A noncompete agreement, also known as a “covenant not to compete” or CNC, is a legal contract that prohibits an employee from competing against an employer for a fixed period of time after a working relationship ends. Noncompetes can be standalone contracts or included as a noncompete clause in larger contracts.
A non-compete agreement is generally used to:
Alyssa Devine, the founder and CEO of Purple Fox Legal, puts it this way: “The purpose of a noncompete agreement is to help business owners protect certain company data and operations, including specialized training or proprietary information.”
Because noncompete agreements are typically enforced when an employee-employer relationship ends, almost all are designed to prevent an employee from taking a job with a competitor. Sometimes, they can even keep an employee from starting a competing business in the same market).
Now that we better understand why businesses use non-compete agreements, let’s talk about what to consider before putting one in place.
First, it’s important to note that some states, like California and Oklahoma, don’t even recognize the validity of noncompetes, so if you do business in one of these states, you’ll need to explore other options (we’ll touch on some alternatives a bit further into this article).
Moreover, a good starting point is to check your state’s laws to see if using will even recognize a noncompete should you decide to draft one. Keep in mind that even states that recognize noncompetes may not enforce them when too many restrictions are placed on the employee. It can also be a good idea to know a few of the factors that courts take into consideration when deciding whether to enforce a noncompete:
if you’re in an industry where it makes sense to ask your employees to sign a noncompete, knowing what courts look for can help. If (and when) the time comes, you want to be sure it will be enforceable by your state.
In addition, determining if there’s a genuine need to protect business interests this way before moving full steam ahead can be a good idea. We spoke with Tara Furiani, CEO and founder of Not the HR Lady and a former Chief People Officer with over twelve years of corporate experience, for more insight. “A company should really only ask an employee to sign a noncompete agreement when there is a legitimate business interest at stake, such as protecting confidential information, customer relationships, or trade secrets,” she says. That’s because there can be a fine line between protecting business interests and limiting employee prospects. “It should not be used as a tactic to silence employees or limit their job prospects.”
With those considerations under our belts, let’s talk more about what’s clauses commonly include.
There’s no one-size-fits-all approach to noncompete agreements, but there is certain information required for them to be considered legally binding. This includes:
It’s always a good idea to outline every detail of the agreement to the best of your ability, and having the information in writing is the best way to prevent disputes in the future. Before asking any of your employees to sign the agreement, speaking with a legal expert is always a good idea. With laws and regulations changing so often, they’ll walk you through it to ensure you comply with state laws.
There are options beyond noncompetes that can also be effective.
Do other methods exist to protect your business’s interests? Once more, we asked Alyssa Devine to share her insights, and she says non-disclosure agreements or NDA’s can be an option worth a closer look. “Because non-disclosure agreements prevent existing employees (and former employees) from discussing, posting, or sharing certain company information they learned while employed, they can be a useful alternative.”
NDAs are especially helpful if employees are dealing with sensitive client information, trade secrets, or if they have access to a company’s confidential information.
Alyssa mentions that nonsolicitation agreements are another option “because they prohibit the poaching of customers, clients, and current employees.” Essentially, a nonsolicitation agreement states that your current employees won’t try to take your customers (or recruit any of their co-workers) away from your company for a certain period of time after they leave your organization.
In addition, “nonsolicitation agreements are especially helpful for sales employees who have access to large amounts of client information,” she says. “Well-drafted nonsolicitation agreements will clearly answer two important questions. First, who the employee is barred from contacting? Second, what type of communication is considered “solicitation”?
NDAs and nonsolicitation agreements can also provide a middle ground for employers and employees. “These alternatives can protect employer interests while also allowing employees to seek new opportunities and promote competition,” says Tara Furiani with Not the HR Lady. And she recommends that companies consider both sides of the coin before moving forward with any agreement. “Employers should carefully consider their options and choose the approach that is most appropriate for their business needs and the needs of their employees.”
So if you’re considering the protections that come with a non-compete, but are unsure if they fit your goals, NDAs and nonsolicitation agreements may be worth investigating.
We’ve covered many of the ins and outs of how these agreements work, but before we go, let’s take a moment to discuss some federal government announcements about non-competes and what the future may hold.
In July 2021, the White House issued an executive order asking the FTC to “curtail the unfair use” of noncompete clauses, and earlier this year, the Biden Administration also proposed rules to prohibit them altogether. Also, the FTC could make a final determination on limits (or a total ban) by the end of this month. From the New Yorker to NPR, there’s been a flurry of news coverage in response to these developments, so we asked our experts if they see the use of noncompetes fading away anytime soon.
“Employers may begin to use them less as a result of the executive order and increasing public scrutiny,” shares Tara Furiani. “I believe it will end up being a positive development, as it will help to promote greater employee mobility and competition.”
Alyssa Devine shares that while federal legislation can make a difference, there will be more “companies committed to fairness and retaining top talent who will use noncompete agreements less and less.” Executive orders and potential legislation are not the only reason. “Following the pandemic, employees have more bargaining power, and businesses are doing everything they can to retain top talent,” she says. “With more options for employees, coupled with the increasing public awareness around noncompetes, it’s likely they’ll be used less as time goes on.”
At the end of the day, using a noncompete agreement boils down to a variety of factors. There is a lot for business owners to think about, from understanding if they are enforceable where you do business (or even just deciding on which details to include when drafting an agreement). Because noncompetes aren’t one-size-fits-all, it’s important for employers to understand all of their options and how they fit into their long-term strategy.
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.