In July 2021, President Joe Biden signed an Executive Order, “Promoting Competition in the American Economy, that encouraged the Federal Trade Commission (FTC) to develop new rules limiting non-compete agreements. Non-compete agreements have been in the spotlight over the past decade, perhaps most notably in the case of Jimmy John’s, the sandwich chain.
In 2016, following an investigation by the New York attorney general’s office, Jimmy John’s agreed to stop including non-compete agreements in its hiring documents. The chain previously had barred employees – even its hourly workers -- from taking jobs with competitors for two years after leaving the company and from working within two miles of a Jimmy John’s.
But when can a non-compete agreement be used legally? And how can you know whether you should sign one or not? This article will examine the ins and outs of this legal agreement and answer some of the most frequently asked questions about it.
What Does a Non-Compete Agreement Mean?
A non-compete agreement (also called a non-compete clause) is a legally binding contract in which an employee agrees not to work with a competing business or start a similar company for a set period of time after leaving his current employment.
The main reason employers like the clause is that it can keep former employees from divulging sensitive information (like trade secrets, client/customer lists, or marketing plans) if they decide to work for a rival company or launch a similar business.
However, opponents of non-compete agreements argue that the documents allow the employer to control a former employee’s actions after they leave the company, limiting free enterprise and the employee’s right to make a living with their skills.
How Does a Non-Compete Clause Work?
An example of when a non-compete agreement might be used is a software company that doesn't want a former employee sharing detailed knowledge about products under development with a competitor. Another example is a company that offers a niche product or service that does not want a member of its sales team taking their client list with them to a rival business.
However, the wording of a non-compete agreement should be both fair and equitable for everyone involved. The clause should include the following information in order to be enforceable:
- The date the agreement begins
- The reason for enacting the agreement
- The specific timeframe and location the agreement covers
- Signatures of both parties and date of signing
An employer can include a non-compete agreement as one of the terms of an employment contract, or it can form a stand-alone agreement.
Non-Compete Agreement State Laws
Not every state recognizes the legality of non-compete agreements. In fact, three states - California, North Carolina, and Oklahoma – do not enforce them at all. Other states have laws that determine their scope and which professions may use them.
Most of the other states enforce non-compete agreements on some level if they strike a balance between the interests of the employee and the employer. The following states/cities currently recognize non-compete agreements for employees, but they limit their use in certain circumstances (such as banning them for hourly workers or those who are below a certain income level).
| State | Non-Compete Agreements Recognized? | Non-Compete Agreement Laws |
|---|---|---|
| California | No | SB 699, AB 1076 |
| Maryland | Yes | Md. Code, Lab. & Empl. § 3-716 |
| Virginia | Yes | VA Code § 40.1-28.7:8 |
| North Carolina | No | GS § 75-4 |
| Oklahoma | No | 15 OK Stat § 219A |
| Oregon | Yes | ORS 653.295 |
| Illinois | Yes | (820 ILCS 90) Illinois Freedom to Work Act |
| Hawaii | Yes | Haw. Rev. Stat. § 480-4 |
| New Mexico | Yes | NM Stat § 24-1I-2 |
| New Hampshire | Yes | NH Rev. Stat. § 275:70-a |
| Texas | Yes | Texas Business and Commerce Code § 15.50(a) |
| Massachusetts | Yes | MA Gen L ch 149 § 186 |
| Washington, D.C. | Yes | D.C. Law 24-175 |
These discrepancies between states can make it difficult for employers to enforce non-compete agreements across state lines. One of the sticking points for some states is the contract law relationship between at-will employment and non-compete agreements.
Some state courts rule that an offer of continued employment is sufficient consideration to make a non-compete agreement valid under at-will employment status. However, other states believe the opposite. A compromise some state courts offer is that consideration is sufficient only if the employee works for a substantial period (such as two or more years) after signing the non-compete agreement.
How to Negotiate a Non-Compete Agreement
While you may not be able to avoid signing a non-compete agreement in some professions, you often have some room for negotiation. Here are some steps to consider in the negotiation process:
-
Limit the location and timeframe. An employer may try to be as broad as possible in terms of how long and how far away the agreement covers. You can ask for the restrictions to be more reasonable.
-
Ask for "non-disclosure" or "non-solicitation" wording. Non-disclosure agreements state that former employees can't make off with intellectual property, while non-solicitation agreements prevent them from going after important clients. Having these terms in your contract may satisfy your employer yet allow you to keep working in the industry.
-
Speak with an attorney. A labor or employment lawyer will be able to determine if the wording of the contract is enforceable. Depending on your profession, it may be worth your while to get an expert opinion on what your options are before signing the contract.
Pros and Cons of Non-Compete Agreements
As you can see, there are pros and cons to non-compete agreements. Let’s look more closely at them.
| Pros | Cons |
|---|---|
| Protection of trade secrets. A non-compete agreement can prohibit a departing employee from taking trade secrets and intellectual property to a rival company. | Discouraged employees. Some current employees may feel that they have little reason to become invested in a company after signing a non-compete agreement. |
| Reduced employee turnover. Employees who have signed a non-compete agreement might have less desire to change jobs. | Hesitant new talent. Fearing they may close the door to future opportunities, some qualified workers may stay away from a firm that has non-compete agreements. |
| Prioritized training. An employer that uses non-compete clauses may be incentivized to spend more time and money on employee training and education. | Expensive to enforce. Legal fees to enforce non-compete agreements can be prohibitive. |
Helpful Resources:
Non-Compete Agreements - Obama White House
Non-compte contract - U.S. Department of Treasure
Business Basic Non-Compte Agreement - Forbes
FAQS about non-compete agreements
-
What happens if you violate a non-compete agreement?
Typically, if an employee violates a non-compete agreement that is valid and enforceable under state law, the employer will file a lawsuit. The suit will be for monetary damages the violation has caused or an injunction directing the employee to refrain from violating the agreement – or both. In most cases, the former employee will be able to continue working for a competitor for the duration of the agreement.
-
Can you get out of a non-compete agreement?
The only way to fight a legally binding non-compete agreement is by going to court. If you choose to violate a non-compete agreement, then you will have to wait and see if your former employee files a lawsuit against you.
-
Can an independent contractor get a non-compete agreement?
Employers often ask independent contractors to sign non-compete agreements as part of their contracts. However, because an independent contractor usually does work for multiple clients, many courts do not enforce these agreements.
The bottom line is that you should not blindly sign a non-compete agreement. It is in your best interest to read the agreement carefully. If your state recognizes these clauses, and the wording is limited and reasonable, you might want to go ahead and sign. However, if you have concerns, you may want to negotiate a more limited agreement or consult a lawyer if necessary.
In July 2021, President Joe Biden signed an Executive Order, “Promoting Competition in the American Economy, that encouraged the Federal Trade Commission (FTC) to develop new rules limiting non-compete agreements. Non-compete agreements have been in the spotlight over the past decade, perhaps most notably in the case of Jimmy John’s, the sandwich chain.
In 2016, following an investigation by the New York attorney general’s office, Jimmy John’s agreed to stop including non-compete agreements in its hiring documents. The chain previously had barred employees – even its hourly workers -- from taking jobs with competitors for two years after leaving the company and from working within two miles of a Jimmy John’s.
But when can a non-compete agreement be used legally? And how can you know whether you should sign one or not? This article will examine the ins and outs of this legal agreement and answer some of the most frequently asked questions about it.
What Does a Non-Compete Agreement Mean?
A non-compete agreement (also called a non-compete clause) is a legally binding contract in which an employee agrees not to work with a competing business or start a similar company for a set period of time after leaving his current employment.
The main reason employers like the clause is that it can keep former employees from divulging sensitive information (like trade secrets, client/customer lists, or marketing plans) if they decide to work for a rival company or launch a similar business.
However, opponents of non-compete agreements argue that the documents allow the employer to control a former employee’s actions after they leave the company, limiting free enterprise and the employee’s right to make a living with their skills.
How Does a Non-Compete Clause Work?
An example of when a non-compete agreement might be used is a software company that doesn't want a former employee sharing detailed knowledge about products under development with a competitor. Another example is a company that offers a niche product or service that does not want a member of its sales team taking their client list with them to a rival business.
However, the wording of a non-compete agreement should be both fair and equitable for everyone involved. The clause should include the following information in order to be enforceable:
- The date the agreement begins
- The reason for enacting the agreement
- The specific timeframe and location the agreement covers
- Signatures of both parties and date of signing
An employer can include a non-compete agreement as one of the terms of an employment contract, or it can form a stand-alone agreement.
Non-Compete Agreement State Laws
Not every state recognizes the legality of non-compete agreements. In fact, three states - California, North Carolina, and Oklahoma – do not enforce them at all. Other states have laws that determine their scope and which professions may use them.
Most of the other states enforce non-compete agreements on some level if they strike a balance between the interests of the employee and the employer. The following states/cities currently recognize non-compete agreements for employees, but they limit their use in certain circumstances (such as banning them for hourly workers or those who are below a certain income level).
| State | Non-Compete Agreements Recognized? | Non-Compete Agreement Laws |
|---|---|---|
| California | No | SB 699, AB 1076 |
| Maryland | Yes | Md. Code, Lab. & Empl. § 3-716 |
| Virginia | Yes | VA Code § 40.1-28.7:8 |
| North Carolina | No | GS § 75-4 |
| Oklahoma | No | 15 OK Stat § 219A |
| Oregon | Yes | ORS 653.295 |
| Illinois | Yes | (820 ILCS 90) Illinois Freedom to Work Act |
| Hawaii | Yes | Haw. Rev. Stat. § 480-4 |
| New Mexico | Yes | NM Stat § 24-1I-2 |
| New Hampshire | Yes | NH Rev. Stat. § 275:70-a |
| Texas | Yes | Texas Business and Commerce Code § 15.50(a) |
| Massachusetts | Yes | MA Gen L ch 149 § 186 |
| Washington, D.C. | Yes | D.C. Law 24-175 |
These discrepancies between states can make it difficult for employers to enforce non-compete agreements across state lines. One of the sticking points for some states is the contract law relationship between at-will employment and non-compete agreements.
Some state courts rule that an offer of continued employment is sufficient consideration to make a non-compete agreement valid under at-will employment status. However, other states believe the opposite. A compromise some state courts offer is that consideration is sufficient only if the employee works for a substantial period (such as two or more years) after signing the non-compete agreement.
How to Negotiate a Non-Compete Agreement
While you may not be able to avoid signing a non-compete agreement in some professions, you often have some room for negotiation. Here are some steps to consider in the negotiation process:
-
Limit the location and timeframe. An employer may try to be as broad as possible in terms of how long and how far away the agreement covers. You can ask for the restrictions to be more reasonable.
-
Ask for "non-disclosure" or "non-solicitation" wording. Non-disclosure agreements state that former employees can't make off with intellectual property, while non-solicitation agreements prevent them from going after important clients. Having these terms in your contract may satisfy your employer yet allow you to keep working in the industry.
-
Speak with an attorney. A labor or employment lawyer will be able to determine if the wording of the contract is enforceable. Depending on your profession, it may be worth your while to get an expert opinion on what your options are before signing the contract.
Pros and Cons of Non-Compete Agreements
As you can see, there are pros and cons to non-compete agreements. Let’s look more closely at them.
| Pros | Cons |
|---|---|
| Protection of trade secrets. A non-compete agreement can prohibit a departing employee from taking trade secrets and intellectual property to a rival company. | Discouraged employees. Some current employees may feel that they have little reason to become invested in a company after signing a non-compete agreement. |
| Reduced employee turnover. Employees who have signed a non-compete agreement might have less desire to change jobs. | Hesitant new talent. Fearing they may close the door to future opportunities, some qualified workers may stay away from a firm that has non-compete agreements. |
| Prioritized training. An employer that uses non-compete clauses may be incentivized to spend more time and money on employee training and education. | Expensive to enforce. Legal fees to enforce non-compete agreements can be prohibitive. |
Helpful Resources:
Non-Compete Agreements - Obama White House
Non-compte contract - U.S. Department of Treasure
Business Basic Non-Compte Agreement - Forbes
FAQS about non-compete agreements
-
What happens if you violate a non-compete agreement?
Typically, if an employee violates a non-compete agreement that is valid and enforceable under state law, the employer will file a lawsuit. The suit will be for monetary damages the violation has caused or an injunction directing the employee to refrain from violating the agreement – or both. In most cases, the former employee will be able to continue working for a competitor for the duration of the agreement.
-
Can you get out of a non-compete agreement?
The only way to fight a legally binding non-compete agreement is by going to court. If you choose to violate a non-compete agreement, then you will have to wait and see if your former employee files a lawsuit against you.
-
Can an independent contractor get a non-compete agreement?
Employers often ask independent contractors to sign non-compete agreements as part of their contracts. However, because an independent contractor usually does work for multiple clients, many courts do not enforce these agreements.
The bottom line is that you should not blindly sign a non-compete agreement. It is in your best interest to read the agreement carefully. If your state recognizes these clauses, and the wording is limited and reasonable, you might want to go ahead and sign. However, if you have concerns, you may want to negotiate a more limited agreement or consult a lawyer if necessary.
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