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What Is a Noncompete Agreement?
A noncompete agreement is a legal contract between an employer and an employee where the employee agrees to not enter into competition with the employer while employed or after the employment relationship ends. Noncompete agreements can be drafted as standalone agreements or within a larger employment contract.
Noncompete vs. Nondisclosure
A nondisclosure agreement (NDA) imposes a legal obligation on the employee to keep information about their employer confidential, even after the employment relationship ends. NDAs restrict an employee from sharing information such as trade secrets and proprietary information.
Should You Have New Hires Sign a Noncompete?
Noncompetes are becoming much less popular because they’ve become harder to enforce over the years. Because of their limited enforceability, many companies use noncompetes only when they’re absolutely necessary.
In some states, such as California, Montana, and Oklahoma, they’re prohibited. Now, the federal government has announced its intention to further restrict them.
In 2021, President Biden issued an Executive Order calling for the ban or limitation of noncompete agreements, and the effects are posed to be far-reaching. According to the official Fact Sheet released by the White House, “roughly half of private-sector businesses require at least some employees to enter noncompete agreements, affecting some 36 to 60 million workers.”
“The Order includes 72 initiatives by more than a dozen federal agencies to promptly tackle some of the most pressing competition problems across our economy. Once implemented, these initiatives will result in concrete improvements to people’s lives.” – Official White House statement
As it relates to noncompete agreements, Biden has directed the Federal Trade Commission (FTC), the federal agency responsible for protecting the American consumer and enforcing civil antitrust law, to ban or limit organizations from requiring employees to enter into noncompete agreements. Banning or limiting noncompete agreements will “make it easier [for people] to change jobs and help raise wages,” says the White House.
So, what happens now? To be clear, an Executive Order is not a law. While Biden has directed the FTC to take this action, it remains to be seen when or if the agency will do so. The main takeaway is that if your business wants to use a noncompete agreement, you should move forward cautiously and get the advice of a business attorney.
Common Terms Included in Noncompete Agreements
What terms you’ll find in a noncompete agreement varies state-by-state. Below is a list of the most common terms included in noncompete agreements.
Recitals, sometimes called the preamble, is the introductory section of a contract that lists the parties and the contract’s purpose. Recitals describe why the parties have decided to enter into the agreement.
Description of What’s Prohibited
Noncompete agreements must define what is prohibited by the agreement. This usually includes a noncompete covenant and a nonsolicitation covenant. A noncompete covenant prohibits the employee from engaging in business activities that compete with the employer. A nonsolicitation covenant prohibits the employee from soliciting business from the employer’s clients or customers.
Noncompete agreements cannot be enforced for an indefinite period of time. They must include a term defining the duration of the agreement. Each state has its own rules for how long a noncompete agreement can continue.
Noncompete agreements must be geographically limited. Just like duration, states have their own rules about how geographically broad a noncompete agreement can be.
Choice of Law and Choice of Venue Provisions
Choice of law and choice of venue provisions determine which state’s law applies and where a lawsuit would need to be filed should there be a dispute over the noncompete agreement.
Severability and Merger Clauses
If a court rules that a portion of your noncompete agreement is unenforceable, you still want the rest of it to be enforceable. Severability clauses do this by stating that even if a certain provision is deemed unenforceable, the rest of the agreement must still be enforced.
Merger clauses, on the other hand, state that only the terms in the signed agreement will make up the entire agreement. These are used to prevent parties from arguing that any other statements or promises were a part of the agreement.
Many noncompete agreements are incorporated into at-will employment agreements to help ensure that the employee is, in fact, hired at-will. Companies who intend to hire employees on an at-will basis will want to make sure none of their written agreements — including noncompete agreements — alter the employment relationship.
Noncompete Agreement Template
Because of how specific and varied state rules are about what terms are enforceable, noncompete agreement templates are not advised. Some template providers do account for state laws, but even state-specific templates will not account for industry-specific limitations.
A bad template can lead to unnecessary lawsuits and other legal issues down the road. The best way to create a noncompete agreement is to seek the help of an attorney, even if it’s just to review a template you already have.
How to Create a Noncompete Agreement for Your Organization
Step 1: Consult an Attorney
A noncompete agreement should be drafted by a licensed attorney. Before sending anything to your new hire, consult with your in-house counsel or a business attorney who is licensed to practice in your state. If you have an existing agreement, or if you have been using a template you found online, have an attorney review it to make sure it’s compliant with state law.
Step 2: Determine the Scope, Duration and Distance of the Agreement
In addition to being legally compliant, noncompete agreements should be tailored to your needs. In many states, whether noncompete agreement is enforceable will depend on whether the terms of the agreement are “reasonably necessary.” Be sure that your noncompete agreement reflects what your company actually needs to protect as far as scope, duration and distance.
And remember: if you create a noncompete agreement that goes beyond what is reasonably necessary, you run a great risk of rendering the agreement illegal. For example, if your company’s clients are all within a 50-mile radius of your headquarters and your business activities don’t extend far beyond that, a noncompete agreement that prohibits competition within a 300-mile radius will likely be unenforceable.
Step 3: Make Sure to Provide Consideration
All contracts require consideration to be enforceable. Consideration is what a party receives in exchange for agreeing to the terms of a contract. In the case of an employee, consideration for agreeing to the terms of noncompete agreements is usually the opportunity for employment.
In fact, one of the biggest mistakes companies make is having employees sign noncompete agreements after they’ve already started working as opposed to having them sign it as a condition of employment. This is a problem because, in some cases, an agreement executed this way is unenforceable since no consideration was given to the employee in exchange for agreeing to the terms.
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Natasha is a writer and former labor and employment attorney turned HR professional. Her experience as a litigator and HR trainer inspired her to begin writing about anti-discrimination laws in the workplace. As a writer at Eddy HR, she hopes to provide helpful information to both employees and HR professionals who need help navigating the vast world of human resources. When she’s not writing, you might find her cheering on the Green Bay Packers or hiking in the Northwoods of Wisconsin.
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