Understanding Noncompete Agreements

Have you been asked to sign a noncompete agreement? Many employers ask new employees to sign this type of contract, in which the employee agrees not to start a competing business or go to work for a competitor for a stated period of time after the employment relationship ends.

It's easy to see why employers want employees to sign noncompete agreements. These contracts limit the competition an employer will face from those who have intimate knowledge of how its business works, and are therefore in a great position to woo away customers, clients, and other employees.

But should you sign one? Here's what you need to know if you're asked to agree to a noncompete.

What Is a Noncompete Agreement?

A noncompete agreement, sometimes known as a covenant not to compete, is a type of employment contract in which an employee promises not to work for a competitor or start a competing business for a certain length of time after leaving their current job.

The purpose of a noncompete agreement is to protect the employer's business interests, including customer relationships, confidential information, and trade secrets.

How Long Do Noncompete Agreements Usually Last?

Noncompete agreements usually last anywhere from a few months to a few years, depending on the nature of the job. Sometimes noncompete agreements are structured with a sliding scale of restrictions, where the length of the contract depends on the employee's level of seniority or access to confidential information.

Are Noncompete Agreements Enforceable?

Noncompete agreements let the employer control its former employees' actions long after they leave the company, which doesn't fit well with our country's honored traditions of free enterprise and the right to make a living.

That's why some states don't allow noncompete agreements at all. Even states that recognize these agreements won't enforce a noncompete that lasts too long, covers too much territory, or otherwise places too many limits on an employee's right to move on to greener pastures without leaving his or her chosen profession.

In a few states, noncompete agreements are not enforced at all. In North Dakota and Oklahoma, for example, noncompete agreements are unenforceable. California has gone a step further: Not only are noncompete agreements unenforceable, but an employer who requires employees to sign them can be sued, even if the employer never tries to enforce the agreement.

California recognizes that employees may not realize these agreements can't be enforced. By requiring employees to sign them anyway, the employer is effectively scaring employees into believing that they will be sued for competing, when in fact the employer cannot enforce the contract. Because an employer who engages in this behavior is gaining an unfair advantage over businesses that follow the law, the employer can be sued for unfair competition.

If your state doesn't allow employers to require employees to sign noncompetes, you should bring this to your employer's attention immediately–and don't sign the agreement.

Noncompete Agreements Must Be Reasonable

Even a state that recognizes noncompete agreements might not enforce one that places too many restrictions on an employee. Because noncompete agreements limit an employee's options in the future, they must be reasonable in scope.

A noncompete is most likely to be enforced if it is limited in:

• Time. The shorter the agreement, the more likely a court is to find it reasonable. Although there's no clear cut rule, agreements that last for a year or two are more likely to be upheld than agreements that extend well into the future.
• Area. A court is more likely to find a noncompete reasonable if it applies only to a limited geographical region, in which competition would truly undermine the employer's business. How large an area is reasonable will depend on the industry.
• What counts as competition. Employers are more likely to win in court if they prohibit an employee from working for a short list of direct competitors, or prohibit the employee from starting a new business in the precise field the employer occupies.

Because a noncompete agreement limits your right to earn a living, you should be asked to sign one only if it's necessary to the employer's business. For example, high-level employees who will learn the employer's trade secrets and the ins and outs of how the business runs can do plenty of damage to the employer if they leave to start a competing business.

Low-level employees who perform basic administrative tasks, customer service, or manufacturing, for example, probably wouldn't harm the company if they went to work for a competitor.

Noncompete Agreements Are Contracts

A noncompete agreement is a contract, in which you agree to give up a right you would otherwise have. You should receive something in exchange for this promise.

Courts have generally said that a job is sufficient reward for signing a noncompete agreement. This means that an employer may make a job offer contingent on signing a noncompete. If you are already employed, however, you should ask your employer to provide you with some additional benefit, such as a promotion or raise, in exchange for signing away your rights.

Talk to a Lawyer About Your Noncompete Agreement

If you have concerns about a noncompete agreement you are asked to sign, talk to an experienced lawyer right away.

If your state recognizes noncompete agreements, and the contract you are presented with seems limited and reasonable, you might want to go ahead and sign.

If, however, you are asked to sign a broad agreement that could significantly restrict your ability to earn a living in the future, it might be worth consulting with a lawyer to find out whether the agreement is legal and what steps you might take to negotiate a more limited arrangement with your employer.