Non-Compete Agreements: What Employers Should Know

A non competing agreement being signed by a candidate

To prevent unfair business competition, many industries include non-compete clauses in their employment contracts. To accomplish this, they prevent their employees from working for their competitors within a specified period. However, while beneficial to employers, non-compete agreements can limit the employee’s future when job hunting. Thus, you and your employee must understand these clauses before signing a contract.


Non-Compete Agreements: What It Is

Employers require employees to sign non-compete agreements to protect the company’s interests. These agreements are legal agreements that prohibit employees from disclosing proprietary information to others during or after their employment period. 

In most cases, non-compete agreements include a clause forbidding an employee from working for a competitor during a pre-established period. In addition, employees cannot start their own business in the same field. In return, the employee will receive monetary compensation or other benefits. ​

Companies and employers use non-compete clauses to protect their trade secrets and confidential business information. Confidential business information includes customer information, information about unreleased products, and business ideas. A non-compete agreement can prevent employees from sharing this information and potentially benefit your competitors. 

Non-compete agreements may also include provisions to prevent an employee from leaving your business for a better offer from the competition. This is common practice with businesses in highly competitive industries and fields. However, checking if such agreements are legal and enforceable in your state is important.


Non-Compete Agreements: The Requirements 

Under federal laws, non-compete agreements are only enforceable in limited circumstances. You can only include non-compete clauses that have reasonable scope and length. In most cases, you can only enforce agreements necessary for protecting the business’s interests and won’t cause undue disadvantage to the employees. 

Compensation is one of the most important factors when writing a non-compete agreement. An employer needs to offer benefits in exchange for limiting the employee’s future opportunities. For instance, these benefits could include a signing bonus or stock options. Generally speaking, the job offer alone considers new employees sufficiently compensated. Even so, existing employees may be able to receive a raise or promotion if they sign a non-compete agreement.

Next, a non-compete agreement must be fair and reasonable. Although it limits your employees’ future prospects, it shouldn’t hinder their ability to earn a living. For example, if an employee finds a better opportunity closer to home, the agreement should not stop them from seeking that employment. 

Historically, non-compete agreements have been criticized for hurting employees’ wage growth and job mobility. As such, if you must impose a non-compete clause when signing an employee, you must ensure that you are not infringing on the employee’s future and not violating any public policy. There are states, like California, where non-competes are not enforceable. Thus, it is important to seek advice from your legal counsel. 

Lastly, you need to ensure that both you and your employee understand the content of the non-compete clause. The agreement must be clear on how long it is enforceable and what areas it covers.


Why Are They Used? 

Certain industries find non-compete clauses to be useful. As an employer, you want to protect your company against competitors. A non-compete agreement will help protect your company’s trade secrets and reduce employee turnover. Here are reasons why non-compete clauses are used:

  • Protect intellectual property. A company can safeguard its intellectual property and maintain a competitive edge by restricting its employees from disclosing or using proprietary information for competitive purposes.
  • Protect trade secrets. Employees generally gain access to sensitive information or secrets while working at a company. These may include pricing information, formulas, recipes, ideas, and future products. If an employee uses the information outside the company, the employer may be at a disadvantage in the market.
  • Preserve information to produce your goods or services. Non-compete contracts protect your company from employees sharing proprietary information, such as marketing strategies or new products. 
  • Maintain a competitive advantage. In today’s intensely competitive market, you need to stay one step ahead of your competitors. A non-compete clause limits former employees’ ability to join a competitor immediately after leaving an organization, thus safeguarding a company’s competitive advantage. This clause prevents competitors from using your former employee’s skills and knowledge against you.


Federal Trade Commission’s Choice

The Federal Trade Commission announced its final ruling on banning non-compete agreements between employees and employers on April 23, 2024, and this ruling will take effect on September 4, 2024. The FTC concluded that the ban would encourage fair competition, wage increases, and industry innovation. 

Employers must notify their workers that the non-compete clause in their contracts will not be enforced. The FTC mandates that employers do this through clear and individualized communication

However, there are exceptions to this ban. For one, the rule will not apply to financial institutions, airline companies, and businesses subject to the Packers and Stockyards Act. The FTC ban will also not affect existing non-compete agreements for senior executives, agreements in connection with the sale of a business, and agreements entered into before the date of the ruling.