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A noncompete agreement is a legal clause, addendum, or separate contract that bars employees from working for, doing business with, or starting a competing business for a specified period of time.
In April 2024, the Federal Trade Commission (FTC) issued a final rule banning new noncompete agreements and making virtually all existing noncompetes unenforceable. The exceptions are existing noncompetes for senior executives “earning more than $151,164 annually and who are in policy-making positions.”
The rule became effective in August 2024 and has been challenged in court by the U.S. Chamber of Commerce, which sued the FTC to block the ban, calling it “an unlawful power grab.”
Meanwhile, here is what you need to know about noncompetes, how they have worked in the past, and how they could continue to work if the FTC rule is blocked.
Key Takeaways
- A noncompete stops an employee from working for a competitor for a certain amount of time after leaving the company.
- Noncompetes may include a non-solicitation agreement preventing an employee from poaching customers or other employees.
- They may also include a confidentiality agreement to keep employees from sharing information that the employer wants kept private, such as product formulations or marketing plans.
- A new FTC rule would largely ban noncompetes nationwide, although employers would still be able to use confidentiality agreements.
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How Noncompetes Work
A noncompete contract or a covenant not to compete is governed by state law, and some states had already banned or severely restricted them before the FTC took its recent actions. Where they are allowed, these contracts can have several different components:
- A traditional noncompete clause, which prohibits the employee from joining competing businesses identified either by name or description during a specified period of time and often within a defined geographical area.
- A non-solicitation agreement. This bars the employee from approaching customers, poaching employees, and/or wooing suppliers of the former employer.
- Confidentiality agreements or non-disclosures. This aspect prohibits using or revealing information that the former employer wants to keep private, which might be product formulations, client lists, marketing plans, or some other proprietary information.
Note that the FTC rule would not ban that entire list. Companies can still require employees to sign non-disclosure agreements (NDAs) “to protect proprietary and other sensitive information.” In addition, the FTC points out, employers have some protection in the form of existing federal and state trade secrets laws, which can result in fines and penalties for employees who break them.
Even where it is legal, a noncompete may go too far in what it bans. Generally, a court’s view of what is reasonable will rest on these five points:
- Potential harm to the employer. The employer has to establish this.
- A specified time period. In the eyes of the court, three to six months for a yoga instructor might be reasonable, but as many as two or even five years could be seen as appropriate for a key executive.
- Prohibited territory. Up to 10 miles away might be fine for a stylist at a hair salon, but a three-state area could be acceptable for a sales manager.
- Impact on the employee. Will it deprive the employee of the ability to make a living or force them to relocate in order to use their experience and skills? Some state courts weigh this point more heavily than others.
- Interests of the general public. A covenant that severely stifles competition to the point of creating a monopoly might not be acceptable.
Courts do not honor provisions they deem unreasonable. There is, however, a wide variation from state to state and even from courtroom to courtroom in what they consider enforceable.
18%
Percentage of U.S. workers covered by noncompetes in 2024, according to the Federal Trade Commission. That’s about 30 million people.
If You’re Asked to Sign a Noncompete As a Job Candidate
Again, if the FTC rule takes effect, this may be a moot issue. Just in case, however, here is some advice for anyone asked to sign a noncompete when taking a new job.
First, don’t sign or agree to the noncompete agreement on the spot. Ask for a copy of the agreement to review while you think about the job offer and your starting date. You’ll probably feel some pressure, but try to resist it.
Focus on what you want to accomplish. If the employer is a local small business and you are dealing with the owner, ask about the origin of the noncompete document. Did a lawyer prepare it specifically for that business, or was it simply downloaded? If it’s a one-size-fits-all online form, discuss it point by point in the spirit of working out an agreement to your mutual benefit and eliminating excess baggage.
Try to determine the company’s real concerns for the noncompete. A competitor hiring you away to pirate their client list, perhaps? In that case, a non-solicitation clause could cover that worry without the additional scope of the document.
You might also suggest shortening the time period that the noncompete will be in effect and ask to add a sentence saying that if you are laid off through no fault of your own, the agreement no longer applies.
And remember, it helps in any negotiation to know at what point you are willing to walk away from the deal.
If You’re Asked to Sign a Noncompete As a Current Employee
Some employers have been known to ask their existing employees to sign noncompete agreements.
This situation becomes especially delicate if the noncompete shows up when you’re being offered a raise or promotion. Some states require that you receive something extra, such as additional vacation time, if you’re asked to sign such a clause when you’re already an employee of a company. In that situation, it’s worth taking the papers home and consulting an attorney before you sign.
Another time to consult an attorney: If you’re asked to sign a noncompete as a condition of receiving severance when you’re being terminated. In fact, it’s often useful to get legal advice before signing anything during a layoff or termination.
Which States Prohibit Noncompete Agreements?
Currently, at least four states—California, Minnesota, North Dakota, and Oklahoma—ban noncompetes entirely, and another 34 plus the District of Columbia have partial bans in effect.
Will the New FTC Rule on Noncompetes Apply to Independent Contractors?
Yes, if the rule stands, it will apply to independent contractors and other types of workers. This is the rule’s actual wording:
“The final rule defines ‘worker’ as ‘a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”
What Happens if You Violate a Nondisclosure Agreement (NDA)?
When someone violates a nondisclosure agreement, the other party (such as an employer) can sue for damages.
The Bottom Line
Many American workers have become subject to noncompete agreements in recent years. However, a new FTC rule, if it stands, will largely eliminate them nationwide, except for a small class of executives.
