Do I Have to Sign My Employer's Noncompete Agreement?

Employers often ask employees to sign noncompete agreements that prohibit the employee from working for a competitor or starting a competing business for a specified period after leaving the company.

Not all states allow noncompete agreements, and the U.S. Federal Trade Commission (FTC) has issued a final rule banning them entirely starting on September 4, 2024. Even the states that currently allow them restrict how employers may enforce them in court.

Read on to learn more about your legal rights when an employer wants you to sign a noncompete.

What Are Noncompete Agreements?

A noncompete agreement is a contract between an employer and an employee that prohibits the employee from:

• accepting employment with a business that competes with the employer; and
• starting a business that will compete with the employer.

This restriction is usually time-limited: for example, it might expire one year after the termination of employment. The agreement is usually a clause within a larger contract, such as an employment or severance agreement.

Noncompete agreements often appear alongside clauses that prohibit employees from disclosing trade secrets belonging to their employer.

The circumstances of an employee's departure from their employer are not always part of a noncompete clause. Limits on future employment could apply to a person regardless of whether they:

• quit their job voluntarily
• were fired by the employer for cause, or
• were part of a scheduled layoff.

From an employer's point of view, a noncompete agreement protects the investment they make in training an employee and giving them work experience. Under such an agreement, employees cannot take those skills to a competitor when they stop working for the employer. And the employer's competitors cannot benefit from a former employee's knowledge of their business operations.

The flip side of this argument is that noncompete agreements significantly limit a person's work opportunities once their employment is over. What protects the employer's interests harms the employee. This can be especially unfair if the termination of employment is completely out of the employee's control, as in the case of layoffs.

Noncompete agreements can have effects beyond the employer and employee. Other businesses may find, for example, that noncompete agreements prevent them from hiring the person they want for a particular job or limit the pool of available employees in their area. Noncompetes might also prevent individuals from forming businesses that would need to hire workers.

Are Noncompete Agreements Legal?

As of June 2024, noncompete agreements are legal in all states except California, Minnesota, North Dakota, and Oklahoma. Elsewhere, they are often subject to restrictions.

Colorado, for example, limits noncompetes to "highly compensated workers," which it defines as people making more than $112,500 per year. A Massachusetts law bans noncompete agreements for certain professions, such as doctors, nurses, and lawyers.

Even in states that allow noncompete agreements more broadly, they are subject to limits on duration and geographic area. Without these limits, people could face difficult situations after leaving a job. An overly broad noncompete agreement might prevent an individual from accepting almost any kind of job in their career field. If a court were to enforce a broad noncompete, the employee might have no choice but to move to a new city or change careers.

What Is Happening With the New FTC Rule Banning Noncompete Agreements?

The Federal Trade Commission (FTC) issued a final rule in April 2024 banning noncompete agreements nationwide. It would apply to all existing noncompetes except "senior executives." Nearly all new noncompetes, including those involving senior executives, would be unlawful.

The rule's effective date is September 4, 2024. The U.S. Chamber of Commerce and other business groups filed lawsuits challenging the rule in early May 2024. They claim the FTC exceeded its authority and failed to follow administrative rulemaking procedures when developing and adopting the rule.

What Are the Limits on a Noncompete Agreement?

The following limits can ensure that a noncompete agreement is more likely to be enforceable in court:

Length of Time

The noncompete agreement must have a limited duration, such as six months to one year after the end of the employment relationship. A noncompete with no end date is far too burdensome for the employee.

Geographic Area

A noncompete must cover a reasonable geographic area. What constitutes "reasonable" may depend on the type of job. For a highly specialized job, it might be reasonable to restrict employment within an entire state or region. A specific distance from the employer might be reasonable in other cases. Prohibiting employment with a competitor anywhere in the country or world is much less likely to be reasonable under any circumstances.

Definition of "Competitor"

The agreement needs to be clear about who counts as a competitor. If a market only has a few businesses, the agreement could list them. It should at least identify the industry and describe the types of businesses it covers.

Definition of "Competition"

What jobs does a noncompete agreement cover? The agreement needs to describe the types of work that count as competition. A noncompete agreement cannot prohibit work that has no reasonable relationship to the employer's trade secrets and economic interests.

Damages for Breach

A noncompete agreement should make it clear what can happen if the employee violates it. Damages for breach typically include:

• injunctive relief, such as a court order barring further breaches
• monetary penalties, usually in a specified amount; and
• attorney's fees and court costs.

What Can I Do If My Employer Asks Me to Sign a Noncompete Agreement?

Most states give employers and employees leeway to negotiate contracts, as long they do not violate employment laws dealing with matters like minimum wage, overtime, workplace safety, and discrimination.

In states that allow noncompetes, an employer can insist that a noncompete clause is a non-negotiable part of an employment or severance agreement. The employee can make counteroffers that clarify or reduce the scope of the noncompete.

The following terms can help protect your interests as an employee:

• The noncompete identifies who or what could be a "competitor" by name or detailed description.
• It describes what types of work may be considered "competition."
• You receive additional compensation in exchange for agreeing not to compete.
• The noncompete is only enforceable if you voluntarily leave your job.

Contact an Attorney

If you have questions about an existing noncompete agreement or one your employer has asked you to assign, consider contacting an experienced employment attorney to discuss your options.