Non-Compete Agreement
A non-compete agreement is a contract between a business and an employee or contractor that prevents the worker from competing with the business after they no longer work for the company. A seller of a business also sometimes signs a non-compete agreement.
Non-compete agreements exist to protect and maintain an organization’s market share. These agreements prevent contractors and employees from revealing business information and trade secrets to competitors. Most non-compete agreements also prevent former workers or business owners from using the organization’s business relationships to further the market share of a competing company.
The non-compete agreement might prohibit the former employee or business owner from doing any of these actions:
- Starting their own business in the same field as their former employer
- Getting a job in the same field
- Accepting another contract from a competing business
- Working with specific competitors
- Working within a certain geographic area of a specific location
A non-compete agreement may have these common elements:
- Businesses that are considered competitors
- Specific types of practices or work the former worker cannot engage in
- Duration of the agreement
- Geographic parameters where the former employee is not allowed to compete
- Consequences of violating the agreement
Laws addressing non-compete agreements vary by state, and there are no federal laws governing whether or not these agreements can be enforced. Some states prohibit non-compete clauses and agreements completely, while others restrict the enforcement of non-compete agreements to specific situations or industries.
The Federal Trade Commission (FTC) proposed a non-compete clauses and agreements ban in 2023. If passed, this law would supersede state laws except those offering greater levels of protection to employees.
Non-Compete Agreement Example
XYZ Corporation requires an employee to sign a non-compete agreement stating the employee cannot engage in business activities that directly or indirectly compete with XYZ Corporation for one year after the employee’s termination from the company. The agreement may also specify that the employee is not allowed to attempt to solicit XYZ Corporation’s clients, customers, or employees during this period.
Another example is a business owner selling their business to another party. Using Delicious Donuts as an example, the seller is not allowed to create another donut shop or work for a donut shop within a 25-mile radius of Delicious Donuts.
Related Terms
Non-Compete Clause
refers to a section that appears within a larger employment contract rather than as a separate legal document.
Non-Disclosure Agreement (NDA)
contracts obligate an employee or contractor to keep trade secrets, confidential business information, or proprietary data confidential.
Non-Solicitation Agreement
clauses restrict employees who leave a company from soliciting or poaching an organization’s employees or clients.
Confidentiality Agreement
refers to a legal contract that requires employees to keep company information confidential.
Restrictive Covenant
is a broader term that encompasses different agreements, including non-compete, confidentiality, and non-solicitation agreements.
Garden Leave
is a time during which an employee is still on a company’s payroll but is not allowed to access company information. In most cases, employees are on garden leave after putting in notice that they are leaving the company.
Breach of Contract
occurs when an employer or employee fails to fulfill a contract’s obligations.
Trade Secrets
include information about a company’s products are services that are kept secret to give the business an advantage over its competition.
Blue Pencil Doctrine
refers to a legal principle allowing a court to modify non-compete agreements to make them more reasonable and enforceable. In some instances, these modifications do not invalidate the whole non-compete agreement.
Geographic Scope
is the geographical area in which a non-compete agreement applies.
Duration of Restriction
is the length of time during which a non-compete agreement is in effect.
Enforceability
refers to whether or not a non-compete agreement is legally binding and if it can be upheld in court.
Employee Mobility
is an employee's ability to change employers or jobs.