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How Do Noncompete Agreements Work?
A non-compete agreement is either a separate contract or a clause in another contract that prohibits an employee from competing with an employer after the term of employment ends, whether the employee resigns or is terminated. The contract is signed at the beginning of the employer/employee relationship. In most cases, these agreements specify a certain period of time during which the employee will be barred from entering into competition with the employer. Employees also agree not to reveal any trade secrets learned during the course of their employment. A non-compete agreement may pertain specifically to a particular market or a certain geographic location. Other terms for a non-compete agreement include “restrictive covenant” and “covenant not to compete.”
How Common Are Non-compete Agreements Today?
The use of non-compete agreements (NCAs) is widespread in the world of business today. Many companies use them to help protect confidential information. A non-compete can prevent an employee from going to work for a competitor or starting up a competing business. Traditionally, these agreements have been required for high-level executives and skilled workers with access to proprietary information. However, according to the U.S. Government Accountability Office (GAO), many employers are currently requiring all types of workers to sign them – even those with no access to confidential information.
Researchers found in two recent national studies that approximately 18% of workers are subject to NCAs, and 38% have signed them at some point in their work histories. A GAO employer survey revealed that, among employers that responded, at least some of the following types of workers were held subject to a non-compete:
- Part-time: 69%
- Hourly: 72%
- Non-managers, salaried: 92%
- Managers, salaried: 98%
- Executives: 98%
What Benefits Do Non-compete Agreements Provide for Employers?
Companies may need non-compete agreements to protect their confidential information and competitive edge. As stated in a report by the Office of Economic Policy, U.S. Department of the Treasury, these contracts can help businesses by:
- Protecting trade secrets
- Safeguarding intellectual property
- Protecting client and customer lists
- Reducing employee turnover
- Improving leverage in future employee negotiations
- Increasing costs for competing businesses
The use of non-compete agreements can help promote innovation by protecting trade secrets. By reducing worker turnover, it may also give employers an incentive to provide training for their staff.
Are There Any Cons With NCAs for Employers?
Although non-compete agreements can help protect confidential information, there may be disadvantages for your business to consider. Requiring employees to sign NCAs may deter some job candidates. This practice can deprive businesses of a much-needed talent pool. There may be some liability involved in terms of accusations of imposing unfair restrictions on employees. In addition, in the event of an employee breach, it can be costly to bring a lawsuit to enforce a non-compete agreement.
Will Non-compete Agreements Hold Up in Court?
There is no federal ban on NCAs in the U.S. However, in 2021, President Biden issued an executive order encouraging the FTC to ban or limit their use, as stated by the National Employment Law Project (NELP). Federal legislation was also introduced in 2021 – the Workforce Mobility Act and the Freedom to Compete Act – to prevent non-compete agreements from being created and enforced. Currently, NCAs are governed by common law and typically upheld in court, provided a protectable interest exists and the non-compete clause is reasonable. Factors the courts consider include:
- The length of the term of restriction for the employee under the agreement
- Whether the employer has a legitimate interest to protect
- If the specified geographic area would prevent the employee from earning a living
- Whether the agreement prevents the employee from doing a different type of work
- Whether the employer offers additional benefits or compensation to the worker for signing the non-compete agreement
Are There Disadvantages for Employees in Signing a Non-compete Agreement?
Detractors of NCAs believe they can lead to lower wages and less job mobility for employees. They may also discourage workers from going out on their own to start new businesses. Once a non-compete agreement is signed, it may reduce a worker’s bargaining power. In some cases, workers forgo their training and experience and leave their occupations entirely because of existing NCAs. Signing a non-compete can limit the ability to switch jobs freely, potentially depriving workers of higher pay and better working conditions.
What Should You Do If You Are Offered a Position that Requires a Non-compete?
It is important to speak with an experienced employment law attorney to ensure you understand your rights before signing a non-compete agreement. Do not refuse to sign the agreement outright, as that could be a red flag for the company, but neither should you sign it on the spot. Instead, ask for a copy of the agreement to review while you are considering the job offer. Have your attorney review the NCA, and be sure to keep a copy for your records. Depending on the circumstances, it may be possible to negotiate the terms of a non-compete agreement with a prospective employer. For example, you might negotiate to shorten the term of restriction or add a clause that specifies the agreement does not apply if you are laid off through no fault of your own.
At the Riggan Law Firm, we represent both individuals and businesses in a range of employment law matters, including NCAs. Whether you need legal advice regarding a non-compete agreement or legal representation in a dispute, you can rely on our award-winning legal team. With more than 30 years of combined experience in employment litigation, we can provide you with sound legal counsel or aggressive litigation strategies geared toward obtaining favorable outcomes. Contact us today at (314) 528-9661 to request a consultation.
