What Is a Non-Compete Agreement? Definition and Enforcement

A non-compete agreement, also called a non-compete clause, restrictive covenant, or covenant not to compete is a contract formed between an employee and their employer in which the employee agrees that they will not compete with their employer during the term of their employment or after. These agreements prevent a former employee from going on to work for a company in the same industry and prevent employees from leaving a company and starting their own competing business that is in direct competition with their former employer.

Non-compete agreements are often included as part of an employment contract or employment agreement—along with a non-disclosure agreement or non-solicitation clause—when a new employee starts a new job. Such agreements are also given to independent contractors, low-wage workers, and consultants.

While non-competition agreements are made to prevent unfair competition from a former employee, non-disclosure agreements (NDA) are essentially confidentiality agreements meant to prevent an employee from sharing confidential information, trade secrets, or sensitive information to competitors. Both a non-compete agreement and a non-disclosure agreement will often be included in the same contract.

The enforceability of non-compete agreements varies by region and state law, which determines the period of time after employment they are in effect and the geographic area in which they are enforceable. In some states, like California, North Dakota, and Oklahoma, most non-compete agreements are banned and unenforceable.

Overall, non-compete agreements must be reasonable to be enforceable. They cannot hinder the ability for a worker to find employment, have an unreasonable geographic scope that limits worker mobility, or remain in effect for too long a length of time after employment. Use of non-compete agreements in a court of law can only be done in the defense of a legitimate business interest, and companies and employees should seek legal counsel or legal advice from a law firm or employment attorney before signing an agreement to know the terms and enforceability of a specific contract.

Non-compete agreements give employers a way to defend their assets and prevent others from getting an unfair advantage against them.

• Allow for full disclosure: When employees have signed a non-compete agreement, an employer can confidently share confidential information without the risk of the employee using that information against them by starting their own company or leaving for a competitor.
• Protect company secrets: A company may reduce the risk of employees leaving their organization and subsequently sharing information like client lists or company data.
• Incentivize employee retention: Employees are more likely to stay at a company long-term if they feel they cannot take their skills elsewhere.

While non-compete agreements give employers some peace of mind, they can also take some power away from employees. The role of non-compete agreements in the balance of power between employees and employers is often a subject of scrutiny by state law and the Federal Trade Commission (FTC).

• Reduce bargaining power: Employees have less leverage when applying for a job when they can’t share prior knowledge about an industry.
• Hinder talent: Because employees cannot share some information about their past experience, they may be less likely to return to the same field they worked in before.
• Expensive to enforce: Enforcing a non-compete agreement in a court of law can be expensive for both employers and employees.

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