# Non-Compete Agreements: Purpose, Requirements, and Recent Changes

![Non-Compete Agreement](https://www.investopedia.com/thmb/-NQO7bz8lzaOyGkgZphBftwnvL0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/noncompete-agreement.asp-final-be85949b1109447cac7e26727f91527a.jpg)

*— Jake Shi / Investopedia*

## What Is a Non-Compete Agreement?

A non-compete agreement is a legal contract that restricts an employee from competing with their employer after the employment relationship ends. It often includes clauses that prevent the disclosure of company secrets or proprietary information.

Such agreements are designed to protect a company's market position by barring employees, contractors, and consultants from joining or starting a competing business for a defined period. This period and geographic scope can vary, but the intent is to safeguard the employer’s competitive advantage in the industry.

> **Important**
>
> On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning non-compete clauses; the rule aims to protect workers’ freedom to change jobs, increase innovation, and generate new business.The FTC first issued the proposed ban on Jan. 5, 2023. It believes this ban will help an estimated 30 million people.Under this final rule, existing non-competes for the majority of workers will not be enforceable; non-competes for senior executives may still be enforced. Companies cannot issue new non-compete agreements for any employee, including senior executives.

### Key Takeaways

*   Non-compete agreements are legal contracts that restrict employees from competing with their employers after leaving a job, helping to protect trade secrets and market position.
*   The Federal Trade Commission (FTC) has issued a final rule, effective April 23, 2024, banning most non-compete clauses to enhance job mobility and innovation for workers.
*   Enforcement of non-compete agreements varies significantly by state, with some states like California and Oklahoma prohibiting them altogether.
*   Non-compete agreements are distinct from non-disclosure agreements, with the former limiting employment opportunities and the latter protecting confidential information.
*   While non-competes aim to safeguard business interests, they can also limit employees' job prospects and bargaining power.

The validity and [enforcement of a non-compete](https://www.investopedia.com/articles/personal-finance/070114/caution-noncompete-contract.asp) vary by jurisdiction and may require the former employer to keep paying the ex-employee a base salary during the non-compete period.

## How Non-Compete Agreements Function in Employment Contracts

Non-compete agreements are signed when the relationship between employer and employee begins. They give the employer control over specific actions of the employee—even after that relationship ends.

These agreements have specific clauses stating that the employee will not work for a competitor after their employment is over, regardless of whether they are terminated or resign. Sometimes, employees are prevented from working for a competitor even if the new job wouldn’t involve disclosing trade secrets.

Some contract terms may include the length of time that the employee is bound to the non-compete agreement, the geographic location where the employee may work in post-employment, or the market they may work in. These agreements may also be called a “covenant not to compete” or a “restrictive covenant.”

Non-competes stop employees from using learned information to start a competing business after leaving the company. It also ensures that the employer keeps its place in the market.

> **Fast Fact**
>
> Non-competes should be designed to protect the best interests of the employer and the employee.

## Components of a Non-Compete Agreement

Non-compete agreements are generally not standardized, but many have similar restrictive elements. Some of the components you might see in a non-compete agreement are:

*   **Duration**: Non-compete agreements cover specific time frames, such as six months or one year. Long-term agreements are prohibitively restrictive for employees because they can keep them from finding work after leaving an employer.
*   **Geography**: Some agreements consider geographic location, prohibiting an ex-employee from working in specific areas for a set time.
*   **Scope**: Non-compete agreements must specify the type of work or services that an ex-employee cannot provide. They should include information, techniques, procedures, and practices that are unique to the business or otherwise proprietary.
*   **Competitors**: The competition must be defined in the agreement. The company doesn’t need to list them all, but it should give a general idea of the industry and types of businesses that the employee agrees to not work in.
*   **Damages**: Employers define the damages they are entitled to if an employee breaches the agreement.

## Situations and Reasons for Implementing Non-Compete Agreements

Businesses use non-compete agreements to protect their intellectual property, trade secrets, and procedures, and to keep a competitive advantage.

If a contract were not in place regarding the disbursement of information to competitors, many businesses would lose their advantage. Ex-employees could legally use the information they obtained at one company to help a new employer gain an advantage. Additionally, an ex-employee might be able to start their own business using information acquired from another firm.

If this information is provided to competitors, a company might be forced out of the market and industry. This makes non-competes an essential part of the hiring process for many enterprises.

## Common Industries With Non-Compete Practices

Non-compete agreements are common in the media. For example, a television station might have legitimate concerns that a popular meteorologist may siphon viewers away if they began working for a rival station in the same area. This would be considered a reasonable cause to sign a non-compete agreement in most jurisdictions.

These agreements are also common in various other [industries](https://www.investopedia.com/terms/i/industry.asp), such as:

*   Financial services
*   Corporate management
*   Manufacturing
*   Information technology

> **Fast Fact**
>
> Non-compete agreements are enforced differently in many states. Therefore, it’s best to consult an employment lawyer to find out about non-competes in your state.

## Legal Aspects and Variability of Non-Compete Agreements

In the United States, the legal status of non-compete agreements is a matter of state jurisdiction. States vary widely in their enforcement and recognition of non-compete agreements, and many state legislatures have updated legislation related to non-compete agreements.

North Dakota and Oklahoma do not enforce non-compete agreements. California does not recognize non-compete agreements, and an employer that binds an employee to one after employment is over can be sued. Hawaii banned non-competes for high-tech companies in 2015. In 2016, Utah changed legislation, limiting new non-compete agreements to only a year, followed by further revision in 2019.

Most states adopt some sort of standard that a non-compete agreement must not be egregious in the length of time or geographic scope and shouldn’t meaningfully restrict a worker’s ability to find employment. However, jurisdictions differ widely in interpreting what terms of a non-compete agreement would be overly demanding.

## Comparing Non-Compete and Non-Disclosure Agreements

Non-compete agreements are distinct from [non-disclosure agreements (NDAs)](https://www.investopedia.com/terms/n/nda.asp), which generally don’t prevent an employee from working for a competitor.

Instead, NDAs prevent the employee from revealing information that the employer considers proprietary or confidential, such as client lists, underlying technology, or information about products in development.

## Pros and Cons of Non-Compete Agreements

Pros

*   Protect trade secrets and proprietary information
    
*   May inspire more innovations from employees who sign them
    
*   Match employers with employees looking for long-term positions
    
*   Reduce employee turnover
    

Cons

*   Weaken the bargaining power of employees
    
*   Significant amount of wait time before applying for another job in the same field
    
*   Few social benefits
    
*   Can restrict employees without trade secrets
    

### Pros Explained

*   **Protect trade secrets**: These agreements can protect employers from employees leaving for a competitor and sharing proprietary information. That being stated, the agreements should be fair to both the employee signing the agreement and the employer that is issuing it.
*   **Inspire more innovations**: Non-compete agreements can keep ideas and information from spreading, encouraging competitors to innovate to keep up with other businesses.
*   **Used for employee matchmaking**: A non-compete agreement may be used to match employers with employees who plan on staying put in a job or prize being trusted with valuable information.
*   **Reduce worker turnover or exit**: Non-competes can reduce employee turnover because they tend to restrict other employment options. Additionally, businesses with non-competes may need to provide training and education for their employees to continue innovating, benefiting their careers and market value.

### Cons Explained

*   **Weaken employee bargaining power**: Workers are prohibited from seeking a better-paying position or bargaining for more pay or benefits when under a non-compete.
*   **Wait time for a new job can be significant**: Non-compete wait periods may keep employees who decide to leave from finding meaningful employment in their fields of expertise. Employees who sign non-compete agreements may leave their industry entirely if it is too hard to find a new job after signing one.
*   **Few social benefits**: Non-competes generally only benefit the company, not providing much in the way of social benefits for employees.
*   **Can restrict employees without trade secrets**: The U.S. Department of the Treasury’s Office of Economic Policy reported that less than half of workers under non-compete agreements have trade secrets. Unfortunately, this means that more than half of workers under non-compete agreements are unnecessarily restricted by these clauses, further hampering their ability to bargain.

## How Long Do Most Non-Compete Agreements Last?

Typical non-compete periods are six months to one year, but they can last longer. However, it is difficult for businesses to enforce long-term non-compete agreements legally. Some states will not enforce these agreements, and a few do not recognize them as legal.

## How Do I Get Around a Non-Compete Agreement?

If you signed a non-compete and then break the agreement, you could, in theory, be sued. State laws (which differ) set the enforceability (or not) of non-compete agreements.

## Are Non-Compete Agreements Really Enforceable?

State laws differ on the legality and enforceability of non-competes. Law firm Beck Reed Riden LLP has surveyed states and compiled a list of their stances on non-compete agreements, protected interests, standards, and exemptions.

## The Bottom Line

Signing a non-compete might not always be in your best interest, but it benefits your employer. Before signing, consult an employment attorney to understand your state’s laws, as it might be hard to find a job in your field if you leave.

Not all states uphold non-compete agreements, but some do, making it worthwhile to know ahead of time how a non-compete agreement might play out if you leave your job or break your agreement.

> **Article Sources**
>
> 1.  Federal Trade Commission. “[FTC Announces Rule Banning Noncompetes](https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes).”
>     
> 2.  State of North Dakota Courts, via Internet Archive Wayback Machine. “[Osborne v. Brown and Saenger, Inc.](https://web.archive.org/web/20220817100623/https://www.ndcourts.gov/supreme-court/dockets/20170254)”
>     
> 3.  Justia U.S. Law. “[2014 Oklahoma Statutes: Title 15. Contracts: §15-219A. Noncompetition Agreements.](https://law.justia.com/codes/oklahoma/2014/title-15/section-15-219a)”
>     
> 4.  State of California Department of Justice, Office of the Attorney General. “[Attorney General Bonta Reminds Employers and Workers That Noncompete Agreements Are Not Enforceable Under California Law](https://oag.ca.gov/news/press-releases/attorney-general-bonta-reminds-employers-and-workers-noncompete-agreements-are).”
>     
> 5.  Hawaii State Legislature. “[H.B. No. 1090](https://www.capitol.hawaii.gov/session2015/bills/HB1090_CD1_.HTM).”
>     
> 6.  Utah State Legislature. “[Utah Code Section 34-51-201](https://le.utah.gov/xcode/Title34/Chapter51/34-51-S201.html).”
>     
> 7.  U..S. Chamber of Commerce. “[6 Questions About the Impact of Noncompete Agreements on Businesses and Employees](https://www.uschamber.com/employment-law/6-questions-about-the-impact-of-noncompete-agreements-on-businesses-and-employees).”
>     
> 8.  U.S. Department of the Treasury, Office of Economic Policy. “[Non-compete Contracts: Economic Effects and Policy Implications](https://home.treasury.gov/system/files/226/Non_Compete_Contracts_Econimic_Effects_and_Policy_Implications_MAR2016.pdf).”
>     
> 9.  Beck Reed Riden LLP. “[Employee Noncompetes: A State-by-State Survey](https://beckreedriden.com/wp-content/uploads/2022/07/Noncompetes-50-State-Survey-Chart-20220721.pdf).”