What Is a Non-Compete Clause?
A non-compete clause is a provision in an employment agreement that restricts an employee from working for a competitor or starting a competing business for a defined period after leaving the company. These clauses are designed to protect an employer's legitimate business interests, including trade secrets, client relationships, and specialized training investments.
Non-compete agreements have been a staple of employment contracts for decades, but they have become increasingly controversial. A growing number of states have limited or banned their use, particularly for lower-wage workers. Understanding the current landscape is critical for any employer considering a non-compete clause.
Key Elements of an Enforceable Non-Compete
Courts evaluate non-compete agreements based on several factors. To be enforceable, a non-compete clause typically must satisfy all of the following criteria.
Reasonable Duration
The restriction period must be reasonable in length. Courts generally consider 6 to 12 months to be reasonable for most employees. For executives and employees with extensive access to trade secrets, courts may uphold restrictions of up to 24 months.
Restrictions exceeding two years are rarely upheld unless the employer can demonstrate extraordinary circumstances justifying the longer period.
Reasonable Geographic Scope
The geographic restriction must be limited to the area where the employer actually conducts business or where the employee had responsibility. A nationwide restriction for a company that only operates in three states is unlikely to hold up.
For businesses that operate primarily online or serve national markets, defining geographic scope can be more complex. Some agreements use a customer-based restriction instead of (or in addition to) a geographic restriction.
Protected Legitimate Business Interest
The employer must show that the non-compete protects a legitimate business interest. Recognized interests include:
- Trade secrets and confidential information — Preventing employees from using proprietary knowledge at a competitor
- Client and customer relationships — Protecting relationships the employee developed while working for the company
- Specialized training — Recouping the investment in training an employee with unique skills
- Goodwill — Protecting the company's reputation and market position
A non-compete that is solely intended to prevent competition — without any connection to a protectable interest — is unlikely to be enforced.
Adequate Consideration
In many states, continued employment is sufficient consideration for a non-compete signed at the start of employment. But if the non-compete is introduced after the employee has already started, additional consideration may be required — such as a raise, bonus, promotion, or other benefit.
If you are adding a non-compete to an existing employee's agreement, provide new consideration (such as a bonus, raise, or equity grant) and document the consideration in writing. Without new consideration, the non-compete may be unenforceable in many states.
State-by-State Enforceability
Non-compete enforceability varies dramatically across the United States. Here is a summary of the current landscape.
States That Broadly Enforce Non-Competes
Many states, including Florida, Texas, Georgia, and Ohio, generally enforce reasonable non-compete agreements. Even in these states, courts scrutinize the reasonableness of the restrictions and may modify or void overly broad provisions.
States That Restrict Non-Competes
A growing number of states have enacted legislation limiting non-competes:
- California — Bans non-compete agreements almost entirely. Employers cannot enforce non-competes against California employees, even if the agreement was signed in another state.
- Colorado — Prohibits non-competes for workers earning below a certain salary threshold and requires specific notice and disclosure.
- Illinois — Bans non-competes for employees earning below $75,000 annually (increasing in stages).
- Washington — Requires a minimum annual income threshold and limits duration to 18 months.
- Oregon — Restricts non-competes to 12 months and requires a qualifying income threshold.
- Massachusetts — Limits non-competes to 12 months and requires garden leave pay or other consideration.
The FTC's Proposed Ban
The Federal Trade Commission proposed a nationwide ban on non-compete agreements in 2023. While the rule faced legal challenges and its status continues to evolve, it signaled a strong federal interest in limiting non-competes. Employers should monitor developments in this area.
Alternatives to Non-Compete Clauses
If non-competes are unenforceable in your jurisdiction or too restrictive for your hiring needs, consider these alternatives:
Non-Solicitation Agreements
Non-solicitation clauses prevent former employees from soliciting the company's clients, customers, or other employees. They are generally more enforceable than non-competes because they are narrower in scope.
Confidentiality Agreements
Strong confidentiality provisions protect trade secrets and proprietary information without restricting where the employee can work. These are enforceable in virtually every state.
Garden Leave Clauses
Garden leave requires the employee to remain employed (and paid) during a notice period but not work. This keeps the employee out of the market for a defined period while compensating them for the restriction.
IP Assignment Provisions
If your primary concern is protecting intellectual property, a strong IP assignment clause may be more effective than a non-compete.
Non-solicitation and confidentiality agreements are enforceable in nearly every state, including California. If you operate in a state that restricts non-competes, these alternatives provide meaningful protection without the legal risk.
How to Draft a Non-Compete Clause
Define the Restricted Activities
Be specific about what the employee cannot do. "Working for a competitor" is vague. Instead, describe the specific types of work or roles that are restricted. For example: "engaging in the development, marketing, or sale of products that directly compete with the Company's core product line."
Identify the Restricted Territory
Define the geographic scope precisely. Use specific states, metropolitan areas, or a defined radius from the employer's offices. Alternatively, use a customer-based restriction: "You may not solicit or do business with any customer you served during your last 12 months of employment."
Specify the Duration
Keep the restriction period as short as reasonably necessary. Shorter periods are more likely to be enforced and are less disruptive to employee mobility.
Include Consideration
Document the consideration supporting the non-compete, whether it is the initial employment offer, a signing bonus, equity grant, or other benefit.
Add a Severability Clause
Include a provision allowing a court to modify the non-compete rather than void it entirely if any part is found unreasonable. In states that permit judicial reformation (sometimes called "blue penciling"), this can save an otherwise overbroad non-compete.
Enforcement Considerations
Employers who include non-compete clauses should be prepared to enforce them consistently. Selectively enforcing non-competes against some employees but not others can undermine their validity and create claims of discriminatory treatment.
Before pursuing enforcement, consider the costs and benefits. Non-compete litigation is expensive, and public enforcement actions can affect recruiting. Many employers find that a strongly worded cease-and-desist letter is sufficient to achieve compliance without litigation.
Non-compete clauses remain a powerful tool for protecting legitimate business interests, but they must be carefully drafted to comply with applicable law and tailored to each employee's role and access to sensitive information.