What Is A Non-Compete Agreement? (Everything You Need To Know)

If you’re asked to sign a non-compete agreement, you likely have questions about its implications. The U.S. Treasury defines these agreements as “contracts between workers and firms that limit employees’ ability to work for competing firms.”

These contracts typically serve the employer’s interests by ensuring that employees cannot easily transition to competitors and divulge sensitive information.

Whether you are required to sign one depends on your circumstances. Legally, no one can force you to sign a contract you don’t agree with, but refusing may jeopardize your job offer or current employment.

Key Takeaways:

• A non-compete agreement restricts an employee from working for a competitor or starting a competing company after leaving their current employer.

• Such agreements are limited by time, geographic area, and industry specifics.

• Non-compete agreements protect employers by safeguarding their trade secrets and customer base from competitors.

• These agreements can diminish an employee’s negotiation power, as they limit job offers from competing firms.

• Consult legal counsel when considering a non-compete agreement or seeking to negotiate its terms.

What Is a Non-Compete Agreement?

A non-compete agreement is a contract that prohibits an employee from working for a competitor for a specified period after leaving their job. It may also prevent them from starting a competing business.

Most non-compete agreements specify a “reasonable” geographic area, meaning if you relocate far from your current employer’s operations, taking a job in the same field might not violate the agreement.

To be enforceable, a non-compete agreement should clearly outline:

• A precise definition of what constitutes “working for a competitor.”

• The agreement’s start date.

• The duration of the non-compete period.

• The geographic scope of the agreement.

• The necessity and legitimacy of the agreement.

• Compensation terms for signing the agreement.

• Enforceability if the employee is terminated.

Pros and Cons of a Non-Compete Agreement

While non-compete agreements primarily benefit employers, they can also provide advantages for employees:

1. Job accessibility. Some positions may require you to sign a non-compete agreement. If it’s a stepping stone to a desirable job you intend to stay in, it might be worth the trade-off.

2. Enhanced training opportunities. Employers may be more inclined to invest in training if they believe their employees won’t leave for competitors.

3. Financial incentives. Employers may offer higher wages or promotional opportunities to those who sign non-compete agreements, possibly providing long-term severance if you adhere to the terms.

On the employer’s side, the advantages include:

1. Reduced turnover. Employees bound by non-compete agreements may find it difficult to switch jobs, thus remaining longer with the company.

2. Protection of trade secrets. Non-compete agreements help prevent employees from sharing sensitive information with competitors.

3. Safeguarding the customer base. Employees leaving with client lists can harm a company by taking clients to a new employer.

However, there are downsides to non-compete agreements for employees:

1. Job search challenges. A non-compete agreement can significantly limit your ability to find work in your field.

2. Reduced negotiation power. With fewer competing offers, you may find it harder to negotiate salary and benefits.

3. Potential coercion. Many employees are asked to sign non-compete agreements after they’ve started a job, leaving them feeling pressured.

Despite benefiting employers, non-compete agreements also carry risks for them:

1. Prompting employee departures. Asking a long-term employee to sign a non-compete agreement may lead them to seek employment elsewhere.

2. Deterring top talent. Strong non-compete requirements may dissuade skilled candidates from accepting job offers.

3. Disgruntled employees. Employees unhappy with their situation may feel trapped and stay in their roles, negatively impacting productivity.

4. Legal challenges. Overly broad or unclear agreements may not hold up in court, especially since courts often favor employees in these cases.

Can I Be Denied a Job or Fired for Refusing to Sign a Non-Compete Agreement?

The short answer is yes.

However, the specifics depend on the reasonableness of the agreement’s terms. Laws vary by state, so it’s advisable to seek legal counsel.

• Review the agreement carefully. Don’t sign anything you’re uncomfortable with; the reasonableness of the terms is critical.

• If asked to sign after employment begins, you may have more leverage. Employers may hesitate to terminate you over a non-compete disagreement.

• Assess the agreement’s fairness. If the terms are overly restrictive, you are less likely to be penalized for refusing to sign.

• Negotiation is possible. Since you’re not obligated to sign, use it as leverage to modify stringent terms.

What Are Legitimate Reasons for Enforcing a Non-Compete Agreement?

Employers may enforce a non-compete agreement for various reasons, including:

• If you signed a non-compete with a clear definition of competition, your employer is more likely to succeed in enforcement.

• If you take client lists or proprietary information to a competitor, this breach could trigger enforcement.

Enforcement depends on how specific the original contract is. Vague terms may hinder the employer’s ability to enforce the agreement in court.

In ambiguous cases, consulting a legal expert before taking actions that may provoke legal repercussions is advisable.

If an employer pursues legal action for a breach, they typically seek an “injunction,” which may prevent you from working for the competitor during legal proceedings.

Does My Employer Have to Pay Me More for a Non-Compete Agreement?

No, employers are not legally obligated to offer additional compensation for signing a non-compete agreement. However, many will provide “consideration,” which is a form of compensation offered in exchange for your agreement. This could include promotions, enhanced training, or higher wages.

While consideration is beneficial, it may also strengthen the employer’s position in legal disputes regarding the agreement’s enforceability.

Expectations and enforcement of these agreements can vary widely by state, so conduct thorough research before making a decision.

Questions to Ask When Negotiating a Non-Compete Agreement

Here are crucial questions to clarify before signing a non-compete agreement:

• What job opportunities are restricted? Ensure that specific roles, companies, or industries are included.

• When does the agreement expire? The duration should be clearly defined.

• Where am I prohibited from working? The geographic limits should be clearly articulated.

• What is the rationale behind the non-compete agreement? Understanding the company’s reasoning can help if you seek to navigate around it later.

• Does the agreement apply if I am terminated? This should be explicitly stated, as this varies based on termination circumstances.

  Generally, courts favor employees in situations where the employer initiated the termination or acted unlawfully.

Ultimately, aim to minimize future restrictions during negotiations by negotiating for a smaller geographic area, a shorter duration, and more specific job categories. This will enhance your flexibility when considering future employment opportunities.

Non-Compete Agreement FAQ

1. How do I get around a non-compete agreement?

   The best way to navigate a non-compete agreement is to request a release. Schedule a meeting with your current or former supervisor or HR representative.

   • Before the meeting, review the non-compete terms thoroughly to understand what interests they are protecting.

   • Identify any “trade secrets” you may have and how you can assure them that your new role won’t jeopardize these interests.

   • During the meeting, negotiate terms that could allow you to pursue new opportunities while assuring your former employer of your compliance.

   • Having a potential job in mind can streamline negotiations, as you can present specific details that might ease concerns.

2. How serious is a non-compete agreement?

   Non-compete agreements are legally binding contracts. Breaching the terms can lead to significant career repercussions, especially if you blatantly disregard the contract.

3. What happens if you break a non-compete agreement?

   Breaking a non-compete agreement can lead to legal action from your former employer. This may result in a court hearing and a temporary injunction barring you from working with a competitor until the case concludes.

   In extreme cases, a judge may order you to stop working for the competitor altogether.

   If sued, you typically have 20 days to respond. Legal representation is highly advisable, as navigating corporate law is complex.

   You may also explore mediation to reach a private settlement and avoid protracted legal disputes.

4. Are you bound by a non-compete agreement?

   Yes, you are bound by a non-compete agreement. However, they are only enforceable if the restrictions are reasonable and protect legitimate business interests of the employer.

References

1. Federal Trade Commission – Non-Compete Clause Rulemaking

Author

Matthew Zane

Matthew Zane is the lead editor of Zippia's How To Get A Job Guides. He is a teacher, writer, and world-traveler that wants to help people at every stage of the career life cycle. He completed his masters in American Literature from Trinity College Dublin and BA in English from the University of Connecticut.