Non-compete agreements, also known as restrictive covenants, are commonly contained within an employment agreement between an employee and employer, and they are designed to protect the employer’s financial interests and proprietary data.
Recent data demonstrates that one in five American workers have signed non-compete agreements. If an employee resigns or is terminated from their job in order to start a competitive business or to join a competitor, the non-compete provision within their employment agreement may prevent the employee from competing with their former employer.
If you are evaluating your options as an employee subject to a non-compete clause or an employer seeking to enforce a non-compete obligation, you should consult an employment law firm.
To understand details about non-compete provisions, let’s take a closer look at how they work.
Table of Contents
What Is A Non-Compete Agreement?
A non-compete clause is a written provision contained within an agreement between an employee and an employer that may prohibit a resigning or terminated employee from competing directly with the employer in a particular geographic region and for a certain period of time. In most cases, a non-compete clause is included in an employment agreement to protect the employer’s confidential information, and it may bar the employee from:
- Working for a competitor.
- Starting a new company that provides the same services or products as the employee’s former employer.
- Recruiting team members or fellow employees to work at a competing company (also known as a non-solicitation clause).
Non-compete agreements are used in all sorts of industries, and they can help employers protect:
- Trade secrets: If a business uses proprietary designs or strategies, they may want to prevent those ideas or techniques from leaving their facilities.
- Confidential business information: Similar to trade secrets, a company may desire to protect confidential information, such as its supplier relationships, customer lists, key accounts, financial information, and more.
- Company relationships with clients and customers: Many non-competes are drafted to prevent or restrict employees from leaving and poaching their employer’s clients or customers. In this way, a non-compete can prevent a departing employee from setting up their own competitive businesses and stealing away customers by providing the same service at a lower price point or with a similar compelling offer.
- Specialized training: Companies often invest time, money, and resources to specially train their employees. A non-compete may operate to prevent that employee from leveraging that specialized training to compete in a new business venture.
How Long Are Non-Competes Valid?
Timing is a critical factor in non-competes. Many non-compete agreements last somewhere between six months and two years, though the typical non-compete lasts for 12 months.
The restrictive period may vary depending on the industry and the individual’s status within a company. For example, a high-ranking manager may have a longer period of restriction than an entry-level hourly employee, though this may vary from case to case.
The duration of the restrictive period in a non-compete agreement is just one of many different factors to consider, as we’ll discuss in our next section.
Are All Non-Compete Agreements Enforceable?
Quick answer: No. The enforcement of a non-compete agreement depends on the law of the state where the employer is attempting to enforce the non-compete. In many states, non-compete agreements are considered unfair restraints on trade; therefore, most courts apply a multi-factor test to assess the reasonableness of the covenant.
In assessing reasonableness and whether a non-compete agreement is enforceable, the court commonly looks to these factors:
- The length of the restrictive period contained in the non-compete (e.g., 6 months, 12 months, 18 months, 2 years, or longer).
- Whether the employer has a legitimate business interest that it is attempting to protect through enforcement of the non-compete.
- The geographic limits of the non-compete (usually measured in miles from the employer’s place(s) of business).
- Whether the non-compete was supported by consideration.
Taken together, in most instances, in order to be enforceable, the non-compete must be reasonable in time, scope, and geography.
The weight applied to each of these factors may differ depending on the industry at issue and the employee’s status within a company. For example, a court may determine that a longer period of restriction is warranted for a high-ranking executive, whereas a shorter restrictive period may be more appropriate for an entry-level employee. Likewise, a court may be more willing to enforce a longer and more geographically expansive non-compete for a highly-specialized employee working in an innovative industry for a business that maintains heavily protected trade secrets.
What is the Difference Between a Non-Compete Agreement and a Non-Solicitation Agreement?
A non-solicitation provision is usually less restrictive than a non-compete provision and should be narrowly drafted to prevent an employee from soliciting their former clients, customers, or co-workers to join a competitive business endeavor. Courts generally view non-solicitation agreements more favorably than non-compete clauses because they do not restrict an employee’s right to work. When balanced against the company’s legitimate interest — to protect its client base — non-solicitation agreements are generally viewed as imposing a reasonable restriction as the employee maintains the right to continue working in their area of expertise, albeit without their former employer’s clients, customers, and employees.
What Are Common Mistakes that Employers Make When Drafting Non-Compete Agreements?
These are some of the most common mistakes that employers make when drafting or attempting to enforce non-compete agreements:
Consideration is Key: To be enforceable, a non-compete agreement must be supported by “adequate consideration.” Adequate consideration can take many forms. The most common form of consideration occurs when the restriction is contained in an employee’s initial offer letter or original employment agreement. In that scenario, the non-compete is “incident to the individual’s employment,” meaning, the offer of the job itself is the value provided to the employee in exchange for agreeing to the restrictions contained in the non-compete. In most cases, these non-competes are enforceable because the employer offered the employee their job contingent on the restriction, and the employee accepted the offer by beginning employment.
Sometimes, employers try to impose a restrictive covenant on an existing employee well after the employee’s first day of work. In this situation, employers must offer the employee new and different consideration. This new consideration must have actual value, and usually takes the form of a bonus, a pay increase, or a promotion. Failure to offer this additional consideration could jeopardize the enforceability of the non-compete.
It’s Not All or Nothing: Oftentimes, employers can take an overly aggressive approach to the enforcement of a non-compete or non-solicitation provision. For instance, an employer may try to enforce a nationwide non-compete against an employee who only worked for the employer in a small geographic territory. The enforcement of a non-compete should usually track the employee’s role, specific duties, and territory. If an employer takes an overly-aggressive approach to the enforcement of a non-compete, most courts have the ability to “blue pencil” the non-compete. In this way, a court may unilaterally change the language of the non-compete to invalidate certain terms or reduce particular restrictions. As a rule, employers should ensure that their non-compete and non-solicitation provisions are only as broad as is necessary to protect their legitimate business interests.
Legitimate Means Legitimate: Overreaching is the most common mistake employers make when it comes to non-competes. We saw the most glaring example of employer overreach by the popular sandwich chain Jimmy John’s. In 2014, Jimmy John’s tried to prevent employees from working for any competitive sandwich shop within a two-mile radius of any Jimmy John’s shop for two years after their employment ended. The New York attorney general opened a costly investigation into the sandwich maker’s practices, which it described as classic and unconscionable bullying. Generally, courts are highly skeptical of employer’s enforcement of overbroad restrictive covenants.
What States Do Not Enforce Non-Compete Agreements?
There are a few states in the U.S. who impose an outright ban on the enforcement of non-compete agreements. They include:
- North Dakota
While other states do not have an outright ban on non-compete agreements, they do prohibit them for certain groups of employees.
For instance, in Hawaii, non-competes will not be enforced for tech workers. In the State of Washington, non-competes are not enforceable for any workers who earn less than $100,000 annually.
Colorado, Illinois, Maine, Maryland, Nevada, New Hampshire, Oregon, Virginia, and the District of Columbia all have wage thresholds making enforcement impossible for lower earners.
State laws surrounding non-compete agreements may differ, and new federal laws could ban non-competes entirely. Read our next section to learn more!
What Is The Future of Non-Compete Agreements?
In January 2023, the Federal Trade Commission proposed a new rule seeking to ban the use of non-compete provisions in employment contracts. According to the rule, companies would be forced to tell their current employees that their previously signed non-competes were no longer binding. Many who support this rule, including President Biden, argue that a ban on non-compete agreements would increase hiring generally, make labor markets more competitive, and push down prices. It appears that the FTC’s proposed rule will face many challenges in the form of lawsuits and, possibly, disfavor by the U.S. Supreme Court. For now, we are left with the current state of the law on non-competes and uncertainty about their future.
What Is An Employee’s Duty of Loyalty?
One concept that is commonly overlooked by employees is their obligation to act with loyalty and diligence in their service to their employers regardless of non-compete and non-solicitation provisions, otherwise known as an employee’s duty of loyalty.
Courts have interpreted this to mean that even if an employee is not subject to a non-compete agreement, they are nonetheless required to act with the utmost good faith to advance their employer’s interests. In the day-to-day work environment, this duty of loyalty prohibits an employee from, among other things, diverting business opportunities away from their employer, or using their employer’s resources to secure new employment.
Contrasted with the various duties employees owe to their employers is an employee’s right to practice their trade without interference by a former employer. While employees are almost always prohibited from taking their employer’s proprietary information with them to a future employer, they are permitted to use their general knowledge and skills in subsequent employment settings. Any employee looking to jump ship to a competitor is wise to consider the interactivity between any contractual non-compete obligations they may have, their duty of loyalty to their employer, and their general skills and knowledge that can be used in future employment.
Contact an Attorney with Experience in Evaluating Employment Law Issues
The attorneys at Block & Associates have decades of experience in all facets of employment law, and are ready to assist employers and executives in evaluating their employment rights and obligations.