Deborah Neyens is an attorney, educator, and freelance writer with a B.A. in political science and a J.D. from the University of Iowa.
It's a dream scenario. You're offered a new job with great pay and benefits. They'll give you a car, and you even get to work out of your home! But, wait, there's a catch. Your new employer wants you to sign a non-compete agreement as a condition of hire. As far as you can tell, the agreement would prohibit you from working for any company in the same line of business as your new employer for two years after your job ends. Can they do that? Should you sign? Do you have any other options?
Before signing a non-compete agreement or any other restrictive employment covenant, you need to have a basic understanding of what it is you're signing and how it may limit your rights. Here are the answers to some common questions about employee non-compete agreements.*
What Is a Non-Compete Agreement?
A non-compete agreement in its most basic form restricts an employee's ability to go to work for a competitor of the employer during the employment period and for some time after employment ends. Because non-compete agreements interfere with people's ability to make a living, the courts don't particularly like them. An employer must meet exacting standards before a non-compete clause will hold up in a court of law.
Why Do Employers Require Employees to Sign Non-Compete Agreements?
The difficulties of enforcing non-compete agreements don't stop employers from asking employees to sign them. Today's skilled workforce is fickle. Employees are easily lured away with generous job offers from the competitors of their employers. When that happens, employers want to prevent the loss of customers and protect their trade secrets and other proprietary information from being used to compete against them.
A company's customer relationships can be its biggest asset. Businesses protect customer relationships by asking employees with substantial customer contacts to sign non-compete agreements. This prevents an employee who is the "face of the company" as far as customers are concerned from calling on those customers on behalf of a competitor until a replacement employee has an opportunity to build similar relationships.
Employers also use non-compete agreements to protect their proprietary and confidential information. The brain is not a memory card that can be wiped clean when an employee quits a job. It would be difficult, if not impossible, for the employee to forget information learned about the former employer in a new job, especially if that new job involves competing or negotiating with the old employer. The employer seeks to protect that information by preventing former employees from going to work for other companies that could use the information to their advantage.
While actual enforcement of a non-compete agreement may require expensive litigation, employers like them for their deterrent effect. The threat of litigation may make a former employee think twice before going to work for a competitor. A strongly worded letter may persuade a prospective new employer that hiring an employee who is restricted by the terms of a non-compete agreement isn't in anyone's best interest.
Under What Circumstances Will a Non-Compete Agreement Be Enforced?
A non-compete agreement must be narrowly tailored to protect the employer's legitimate interests without unduly restricting the employee's ability to find meaningful work. No one factor is determinative; the courts will consider and weigh all facts to find a balance between the interests of the employer and the employee. Although the laws vary from state to state, courts generally will look at the following factors in determining whether a non-compete agreement should be enforced:
- What the agreement is trying to protect: In order to be enforceable, non-compete clauses must protect legitimate business interests. These include trade secrets and other proprietary information, the employer's investment in specialized technology and training, long-term customer relationships, and customer lists and contacts. A non-compete agreement may not be used to prevent normal competition.
- The impact of the agreement on the employee's ability to earn a livelihood: Courts will balance the employer's interests with the hardship to the employee. If the agreement leaves an employee with little ability to find new work without violating the non-compete clause, the court is more likely to strike it down than if the employee's skills are easily transferable to a new, unrestricted industry.
- The scope of the geographic restrictions: The courts will look to see if any restrictions on where the employee can go to work are reasonable based on where the employer actually does business and the area in which the employee worked. The courts also will consider the scope of the employee’s position. For example, a broader restriction will be more appropriate if the employee was active in all aspects of the company’s affairs than if the employee worked in a limited area. Alternatively, a customer-specific non-compete provision (especially if limited to the employee's customer contacts) probably would be enforced even if there is no geographic limitation.
- The duration of the restriction: The length of time during which a former employee is restricted from competing must be reasonable. If the employer is seeking to protect its confidential information from a competitor, the courts will look at the reasonable "shelf life" of the information. For example, a shorter time period would be needed to protect pricing information in a volatile market while a longer time would be necessary to protect the formula for making a product. If the employer is trying to protect its customer relationships, the courts will look at how long it would take a new employee to establish relationships with those customers. Although longer restrictions have been upheld and shorter restrictions have been struck down, a general rule of thumb is a duration of two years or less is reasonable.
- What the employee received in consideration for signing the agreement: To be enforceable, the employee must have received something of value in exchange for signing the agreement. This condition is most easily satisfied by making signing a condition of hire. Then, the promise of employment is deemed sufficient consideration. If the agreement is imposed after employment already has begun, the courts of some states will find continued employment to be sufficient. In other states, the courts require that the employee received something else of value, like a raise, signing bonus, or additional benefits.
- The circumstances under which the employee's employment terminated: Some courts will look to the reasons why the employee left in deciding whether to enforce a non-compete agreement. The court may find the employer doesn't have a legitimate interest in enforcing an agreement against an employee fired for poor performance because the employee's incompetence demonstrates a limited ability to compete. On the other hand, if the employee resigned to accept new employment, the court may be more likely to enforce the agreement.
What Are My Options If a Prospective Employer Asks Me to Sign a Non-Compete Agreement?
If you are being asked to sign a non-compete agreement as a condition of hire, you won't have a lot of choice as to whether or not you sign it. If you don't sign, you likely will not be hired, plain and simple. The good news, however, is that many employers don't put much time and effort into their non-compete agreements. They simply pull out a form agreement that was drafted years earlier, taking a one-size-fits-all approach to a document that should be fact-specific and narrowly tailored to fit the employee's circumstances. That means there should be plenty of room for a savvy employee to negotiate a better deal.
The first thing you should do when told you'll be required to sign a non-compete agreement is ask to see a copy of the agreement in advance. Then review the agreement with qualified legal counsel who can help you understand its terms and identify the provisions you should request to be modified. Once you know the changes you would like to make, you can deal directly with the prospective employer or have your attorney talk to the employer's legal counsel to negotiate the terms.
Reviewing a Non-Compete Agreement
Some things to look for and potential changes to request include the following:
How does the agreement define competition? What is considered prohibited competition should be defined as narrowly as possible. For example, if the agreement would restrict you from working for "any company that manufactures outdoor recreational equipment," propose that the following qualifiers be added:
- "that is substantially the same or that competes with products manufactured by Employer at the time the employment relationship ends," and
- "about which Employee acquired confidential information in the course of employment."
This language does a couple of things:
- It would allow you to work for a company that makes outdoor recreational equipment different than the products your employer makes; and
- It would allow you to work for a company that makes some of the same products as your employer but not those about which you have specialized knowledge.
Is there a geographic restriction? Again, your goal is to limit the restriction as much as possible. Request that it include only those areas in which you actually worked as opposed to all markets in which the employer does business. You should resist any restriction that goes beyond the areas where the employer does business during your employment.
Is there is a customer based restriction? Request that any limitation on your future ability to work for or have contact with your employer's customers be limited to those customers with whom you had contact during your employment or, even better, during the last six months or year of your employment. Also, if you will be bringing customers to the employment relationship, you should specify that the prohibition does not apply to any customers with whom your relationship predated your employment.
What is the duration of the restriction? It's in your best interest to negotiate the shortest duration you can get. You also should attempt to get some protections against being fired. This can be done with language specifying that in the event you are involuntarily terminated, the duration of the restriction shall be equal to the number of weeks of severance pay you receive. This means if you receive a year's severance pay, you would be restricted from competing for a year. If you receive no severance pay, there would be no restrictions.
Are there any provisions for damages? Because economic loss for violation of a non-compete agreement can be difficult for an employer to prove, many non-compete agreements specify an amount of damages that must be paid by the employee for a violation of the agreement. The amount of these "liquidated damages" need not be based on an actual loss. Some agreements also specify that an employee found to be in violation must pay the employer's attorney fees and return any profits made to the employer. These provisions are not in your best interest and you should ask that they be eliminated.
Are you being asked to sign a non-compete agreement after you already have started employment? If that's the case, ask for additional consideration beyond continued employment in exchange for signing. This would be a good time to secure that raise or promotion you've been seeking.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2012 Deborah Neyens
Paula on January 31, 2019:
My daughter in law, was asked to sign a non compete document yesterday and was told if she didnt sign it she would be terminated. She signed the document and was terminated today. No reason was given and she was told not to expect her paycheck tomorrow or commuission. Is the non compete binding?
Andie on December 05, 2018:
My husband (similar age) left his last employer a couple of months ago and is applying for a new job in environmental consulting. They are asking him to sign a non-compete that states if he leaves the company he cannot work at a "competing company" for 24 months following his departure anywhere in our state. The wording of the document is extremely restrictive. He is in negotiations to have some of it changed. If they don't agree, it's not likely he'll take the job. The same is true for our family-it would seriously impact his ability to make a living. He has every intention of making this new job work, but no one can predict the future. If the company is not able to see the impacts from the employee's point of view, our thought is that maybe the company is not the right fit for us. Good luck!
berenda on November 29, 2018:
My husband is an ATP seat specialist in the medical equipment field. He is 54 and has done only this profession since he was 17. The company he works for after 3 years has told him today if he doesn't sign a non-compete in 14 days feel free to find other employment. As your article states the main office is 4 hours away from our home and the agreement states that he cant work in the state of Florida for 1 year. This will severely impact his ability to make a living. He has worked hard for all these years and to establish contacts and build a good reputation. Should he take it to an attorney?
Ali on June 10, 2018:
jean palm springs ca on April 28, 2014:
I have been asked to sign one just today. I have given notice and now they want me to sign a contract. what would you do? Im an insurance agent.
JPSO138 from Cebu, Philippines, International on November 26, 2013:
Some people tend to sign right away any document especially if they are excited about getting hired or getting good something out of it. But it is very crucial indeed to scrutinize each content as there may be gray areas in the contract that may cause a problem later on. Thanks for sharing this information.
Deborah Neyens (author) from Iowa on April 29, 2013:
Hi Sarah. If your employer isn't enforcing noncompete clauses against other former employees, they may have trouble doing so against just one employee. The lack of enforcement undermines their claim that enforcement is necessary to protect their interests.
Sarah on April 28, 2013:
I work for a care company and have a applied for a new job but I will work for an old client of my old employee but I didn't solicit it in anyway I just went for a job but I have this in my contract
It is a condition of your employment, that for a period of six months immediately following the termination of your employment for any reason what so ever, you will not, whether directly or indirectly as a principal, agent, employee, director, partner or otherwise how so ever approach any individual or organisation who has during your period of employment bein a customer of ours, if the purpose for such an approach is to solicit business which could have been undertaken by us. Neither shall you set up a business, or work for a business in any capacity, in direct competition with ourselves with a 50 mile radius of any of our sites, within the 6 month period
And as for direct competition I will be working for one client and managed by a case management company so I'm not working for another company in direct competition ..
Also other staff have left to work with clients and new company's and my employer did nothing can they just cherry pick one member of staff
Deborah Neyens (author) from Iowa on April 08, 2013:
Interesting that this issue never came up for you in nursing, Peggy. I know doctors often are asked to sign non-compete agreements. Thanks for the comment.
Peggy Woods from Houston, Texas on March 28, 2013:
Interesting and informative article Deborah which, I am sure, will help many people who find and read this. It was never an issue during my nursing career but I can readily understand that those in marketing and or in business or scientific development might have to sign these non-compete agreements and for good reason. Voted up and useful.
Deborah Neyens (author) from Iowa on January 01, 2013:
Thanks, vespawoolf. It never hurts to ask for changes. The worst that will happen is the employer says no. Once they've gone that far in the hiring process, they're not going to take back the job offer just because you asked.
Vespa Woolf from Peru, South America on December 23, 2012:
I know you're qualified to write on this subject. I didn't know much about it, but I know people are sometimes too eager to sign such an agreement because of short-sightedness. These are great reminders. Thanks!
Deborah Neyens (author) from Iowa on September 08, 2012:
Thanks for the comments, Nell, Glimmer Twin Fan, Teaches, and tillsontitan. Marketing is one areas where these are very common, due to the extensive customer contacts. Some employers do use them only for their deterrent effect without any intention of pursuing legal action, so it is good advice to see how other employees have been handled. However, you don't want to be the one when the employer decides it's time to finally send a message!
Mary Craig from New York on September 07, 2012:
I liked Unamed Harald's suggestion to see what happens when those before you violatea non-compete agreement. There are times when it is understandable that an employer wants to protect himself and doesn't want you taking clients with you if you leave but other than that this is an archaic practice.
Voted up and useful.
Dianna Mendez on September 06, 2012:
I have had to sign a couple of these when working. Marketing is one area that almost always requires this type of agreement. You have posted a really well defined article and well researched. Voted up.
Claudia Mitchell on September 06, 2012:
Really well written and informative hub! Interesting info that is pertinent to so many. It's always tricky to sign these things, but I do think that sometimes parts are negotiable, especially the geographical part.
Nell Rose from England on September 06, 2012:
Hi deborah, I remember a few people at work complaining about this, evidently it was the secret bit they were scared off, I don't know the outcome of what happened, but I don't think I would do it, interesting and great info, cheers nell
Deborah Neyens (author) from Iowa on September 06, 2012:
Hi Arlene. It would be pretty unusual for a public sector employee to be asked to sign a non-compete agreement. So consider yourself lucky. : ) Thanks for reading and commenting.
Arlene V. Poma on September 06, 2012:
Interesting and very useful for anyone in today's workforce! I have been out of the employment loop for years, but I was employed by the state--not private sector. I don't remember signing any of the documents that you mentioned. All I remember is being told that I was hired. I did manage to show up for 23 years of work.
Deborah Neyens (author) from Iowa on September 06, 2012:
Rcrumple, you raise a very good point, If you have a non-compete, you most definitely should tell your new employer so it doesn't come as a surprise to them if your former employer sues you and them. Because in enforcement proceedings for violation of a non-compete agreement, the former employer often names the new employer as a defendant and adds a claim for tortious interference with a contractual relationship or something of that nature. Being up-front is the best course. Thanks for the comment.
Deborah Neyens (author) from Iowa on September 06, 2012:
You are most welcome, Alecia. It's interesting you were made to sign after you already were working there. Most employers don't do that because the issue of consideration can be so tricky. Thanks for sharing your story.
Rich from Kentucky on September 06, 2012:
Many use non compete's as a form of fear tactic. It's a threat that if you don't comply during your term of employment, you'll never get another job in your field. Slavery, in a way, but you can always tell the next employer and see if they'd be interested in contesting it. Many times, the previous employer doesn't mind threatening to take an individual to court, but they don't want to fight another business with equal or greater legal assets. Great Hub!
Alecia Murphy from Wilmington, North Carolina on September 06, 2012:
I really wish I would have looked into this before I signed a non-compete agreement for my last employer. I figured I would have to sign or be fired but it turned out I had to resign anyway due to my health. In the long run, I don't think it will hurt me significantly but at least next time I will be informed about my rights and know what I'll need to do should something arise. Thanks so much for sharing this valuable information!
Deborah Neyens (author) from Iowa on September 06, 2012:
Thanks, UnnamedHarald, for the comment. However, I do disagree with your opening statement. As the employment attorney for a large corporation, we always would entertain requests for modifications from employees on non-compete agreements. For one thing, the fact that an agreement was negotiated and not simply boilerplate helps when trying to enforce the agreement down the road. Also, as an attorney in private practice, I've have helped individuals negotiate better deals with their new employers. My point is it never hurts to ask. Employees SHOULD ask and try to get a better deal for themselves, one they can live with if they leave employment.
David Hunt from Cedar Rapids, Iowa on September 06, 2012:
The sad fact is most companies will not negotiate for most hires. Non-competes are a form of slavery. Once you've signed one, your best chance to get out of it when looking for another job is to keep your eye on others who leave in violation of the non-compete and note whether the company did anything about it. If they didn't, you have a much better chance of showing precedence of the company not treating all cases equally. Also, you can spend several hundred dollars for a lawyer to go to bat for you. Sometimes when faced with determined opposition, many companies will fold. The problem is, the outcome is uncertain, so be prepared for stress. To repeat, though, generally, if you won't sign, you won't get the job. Unfair? Sure. Do you plan on screwing your company? Doubt it. But they hold all the cards.
Deborah Neyens (author) from Iowa on September 06, 2012:
Thanks for reading and commenting, boyatdelhi and iefox5. As to whether it's wise to sign a non-compete agreement, it depends on how badly you want the job, because you probably won't have much of a choice if you want to work for an employer that will require it. On the other hand, it's wise to negotiate the best deal you can get for yourself.
iefox5 on September 06, 2012:
Signing a non-complete agreement is not wise at all.
Binoy from Delhi on September 05, 2012:
Very informative hub.