Understanding Noncompete Agreements for Business Owners

Noncompete agreements, or "non competes," are legal tools that protect companies from unfair competition but can also present challenges. Whether you’re considering implementing a noncompete contract or reviewing your current noncompete clauses, it’s essential to understand their purpose, enforceability, and impact on your business and workforce.

What is a Noncompete Agreement?

A noncompete agreement, or non compete contract, (sometimes spelled "non-compete") is a legal contract between an employer and an employee that restricts the employee from working for competitors or starting a competing business for a specified period after leaving the company. These agreements help businesses protect trade secrets, proprietary information, and customer relationships by preventing employees from using confidential knowledge gained during their employment to benefit a rival.

However, while noncompete agreements offer some level of protection to companies, employers must also be aware of their limitations and legal considerations.

Why Do Employers Use Noncompete Agreements?

Employers use noncompetes for several reasons:

• Protecting Trade Secrets: Ensuring employees don’t share proprietary processes, product designs, or formulas with competitors.
• Safeguarding Customer Relationships: Preventing employees from leveraging existing relationships with clients to benefit a new employer or personal venture.
• Maintaining Competitive Edge: Stopping former employees from starting rival companies that could lead to market suppression with non-competes.

When Are Noncompete Agreements Typically Implemented?

Noncompetes can be implemented at several key stages:

• At the Time of Hire: Common in executive-level positions or industries where trade secrets are involved.
• Upon Promotion or Role Change: Employees gaining access to confidential business strategies may be asked to sign noncompete agreements when taking on new responsibilities.
• During Layoffs or Terminations: Employers may include noncompete clauses in severance agreements to protect against immediate competition.

Key Elements of a Noncompete Agreement

Noncompetes vary in complexity, but these core elements should always be included:

• Duration of Restriction: This specifies how long the agreement is enforceable after employment ends. Common durations range from six months to two years. Longer terms may invite legal scrutiny.
• Geographic Scope: Outlines where the employee is restricted from working, which can range from a specific city to entire regions, depending on the nature of the business. 
• Restricted Activities: Defines what the employee is prohibited from doing, which can include:
  • Working for a Competitor: Even if the new role doesn’t involve similar responsibilities.
  • Starting a Competing Business: Launching a business in the same industry is often restricted.
  • Soliciting Clients or Employees: Using existing relationships to lure clients or employees away.

The more reasonable and specific these terms are, the more likely they will be upheld in court.

Recent Legislative Changes

Legislation around noncompetes is shifting toward more employee-friendly policies. Some states are placing restrictions on noncompetes, particularly for low-wage workers. The Federal Trade Commission (FTC) is also evaluating whether to ban or further limit noncompete agreements nationwide.

In August 2024, a Texas District Court set aside the Federal Trade Commission’s (FTC) Final Rule that sought to ban most noncompete agreements for U.S. employers. While this ruling may not go into effect unless overturned on appeal, it is a reminder that employers should stay informed about current laws governing noncompete agreements.

Common Clauses in Restrictive Agreements

Beyond noncompetes, companies can include other clauses to protect their interests:

• Non-Solicitation Clause: Prevents employees from recruiting co-workers or soliciting clients to join a competing business.
• Confidentiality Agreements: Focuses on protecting sensitive business information without restricting where employees can work.
• Non-Disclosure Agreements (NDAs): Specifies what confidential information employees cannot share, even after leaving the company.

These clauses can work alongside noncompetes or serve as alternatives.

Alternatives to Noncompete Agreements

Some employers prefer alternatives to noncompetes that protect their business without limiting employee mobility:

• Nonsolicitation Agreements: Limit the ability to recruit co-workers or clients without fully preventing competition.
• NDAs and Confidentiality Clauses: Protect proprietary information and trade secrets without restricting job options.
• Garden Leave Clauses: Pay employees to stay away from competitors for a defined period, ensuring they don’t immediately join a rival company.

These alternatives may offer a more balanced approach that aligns with recent legal trends favoring employee freedom.

Enforceability and Legal Considerations

State-by-State Regulations

Although there is no federal ban on noncompete agreements, individual states have enacted laws that either limit or prohibit their use. For instance, noncompete agreements are unenforceable in California, Minnesota, North Dakota, and Oklahoma. In these states, noncompetes should not be used in any employment relationship. In states where noncompete agreements are permitted, there are often restrictions based on the employee's role or level within the company. Here are some examples:

• Georgia: Noncompetes cannot be enforced against employees without specialized skills, customer relationships, or access to confidential information.
• Massachusetts: Prohibits noncompetes for nonexempt employees, interns, students, employees under 18, and those terminated without cause or laid off.
• Missouri: Noncompetes cannot be applied to secretarial or clerical workers.
• Oregon: Restricts noncompetes for nonexempt employees, those below a certain earning threshold, home care workers, and personal support workers.
• Low-wage workers: Noncompetes are banned for low-wage workers in states such as Illinois, Maine, Maryland, New Hampshire, Rhode Island, Virginia, and Washington.

Even in states with lenient laws regarding noncompetes, the terms of the agreement must be reasonable. Typically, a noncompete agreement will include both a time limit and a geographical restriction on where a former employee can work. What constitutes a reasonable limitation is generally determined by state law or court rulings. For example:

• Florida: Any restriction of six months or less is considered reasonable, while any restraint lasting more than two years is deemed unreasonable.
• Texas: Noncompetes must have reasonable limitations on time, geographical area, and scope of activity. The restrictions cannot be broader than necessary to protect the company’s goodwill or other business interests. For instance, if your roofing company operates within a 50-mile radius, a noncompete that prevents an employee from working within a 100-mile radius after leaving would likely be deemed unreasonable under Texas law.

In addition, some states, including Colorado, Illinois, and Maine, require employers to provide pre-employment notice if a noncompete agreement will be part of the employment terms.

Legal Considerations

If your company plans to implement a restrictive agreement, it is essential to consult with an attorney to ensure the agreement is legally enforceable and fair. Courts may throw out the entire agreement if they find any part of it—such as the duration or geographic scope—to be unreasonable. By having a restrictive agreement carefully reviewed by an employment attorney, you can reduce the risk of it being deemed unenforceable and ensure better protection for your business.

In addition to consulting with an employment attorney, clients of FrankCrum can reach out to their HR Consultant for their HR needs.

Noncompete agreements can help businesses protect their interests, but they must be used carefully to avoid legal challenges and employee dissatisfaction. Both employers and employees benefit from understanding these agreements, considering alternatives, and knowing the legal landscape.

Need assistance? Contact us today for help navigating noncompete agreements.