Non-compete agreements are often used when employers want to ensure that certain employees do not work for competitors after their employment ends. They are typically used to prevent former employees, contractors, and consultants from using their knowledge of proprietary information or company secrets to help a competitor. These agreements are currently legal in most states, but the non-compete enforcement landscape is rapidly changing.
If your company is planning on asking employees to sign a non-compete agreement, it’s important you understand both state and federal requirements. Here’s an overview of non-compete agreements and enforcement.
What is a non-compete agreement?
A non-compete agreement is a legally binding agreement between employees, contractors, or consultants, and employers. Non-compete agreements can be a standalone agreement or part of a broader employment contract.
Non-compete agreements must limit the agreement to a specific, reasonable length of time after employment ends, regardless of whether the employee resigns or is terminated. Non-compete limitations must also be reasonable in the geographic restrictions. Finally, non-compete coverage must be reasonable in the scope of what is considered “competition” (a short list of direct competitors would be reasonable; “any company that could possibly take a Company customer” would not).
Often these agreements are made on the condition of employment. Employers use them to ensure that their employees will not leave the company and join a competitor or start their own competitive business. However, the drawback to non-compete agreements is that they can bar employees from getting another job in their field after their employment ends—even if the new job wouldn’t involve sharing proprietary information. If the employee violates the agreement, they could be liable for agreed-upon penalties or could be enjoined from taking on the new position.
The benefits for employers are clear: non-compete agreements protect their place in the market and reduce turnover. The benefits for employees are sometimes hard to see: while they encourage long-term employment, they weaken the employee’s bargaining power and can prevent them from finding future employment.
Enforceability of non-compete agreements
The enforceability of non-compete agreements depends on compliance with state and federal law. Broadly speaking, non-compete agreements should be specifically tailored to the employee, the confidential company information at stake, and the duration, location, and competitors covered by the agreement. In other words, a company cannot prevent their employees from ever working in the field or for competitors again.
FTC and non-compete agreements
On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule which would ban non-compete agreements in all 50 states. The FTC believes that non-compete agreements “constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.” They are currently seeking public comment. If the rule goes into effect, the FTC estimates it would increase wages by nearly $300 billion per year.
The rule would make it illegal for employers to enter into non-compete agreements with prospective employees—and it would also invalidate existing non-compete agreements. Employers would be required to actively inform employees that they are no longer subject to their agreement. The rule would apply to traditional employees as well as independent contractors. Further, employers would be required to contact (to the best of their ability) ex-employees who were still subject to a non-compete signed during their employment, and inform them that the agreement was no longer in effect.
This is not to be confused with banning other restrictive covenants like non-disclosure agreements, which protect specific confidential company information and trade secrets from being disclosed to a third party. However, if the agreement is so broad that it effectively functions as a non-compete agreement, it would not be enforceable.
Which states ban non-compete agreements?
In addition to the proposed FTC rule, some states already ban or strongly regulate non-compete agreements. California bans non-compete clauses, with a limited exception for a sale of a business, while North Dakota and Oklahoma have rendered them void for virtually all employees.
Furthermore, over 60% of the United States restrict non-compete clauses based on factors like consideration, earnings, notice, job title, reasonability, and more. Any employers who wish to enact non-compete agreements must ensure that they comply with all applicable state and federal laws.
Create legally enforceable employment agreements with SixFifty
When you’re hiring new employees, it’s important to ensure your employment agreements are legally enforceable. From rules governing non-compete agreements to overly broad non-disclosure provisions, poorly worded agreements could put your company at significant risk.
Instead of researching and drafting your own employment agreements from scratch, let SixFifty do the heavy lifting for you. Our legal tools make it easy to draft compliant, legally enforceable agreements in all 50 states. Best of all, if the laws change on the state or federal level, we’ll notify you. It’s the fastest, easiest way to ensure non-compete enforcement is never a problem. Learn more about our products by scheduling a demo today!