Key Takeaways

  • A non-compete clause restricts employees from working for competitors or starting a competing business for a certain period after leaving a job.
  • These clauses protect trade secrets, goodwill, and sensitive business information but are often challenged in court for being overly broad.
  • States vary widely in enforceability—California, Oklahoma, and North Dakota largely ban them, while others impose strict reasonableness tests.
  • The FTC issued a rule in 2024 banning most non-competes, with limited exceptions for senior executives and certain business sale contexts.
  • Alternatives to non-competes include confidentiality agreements, non-solicitation clauses, and intellectual property protections.
  • Employers should carefully tailor scope, duration, and geography to increase enforceability and avoid employee backlash.

Non-Compete Clause: What Is It?

A non-compete clause prohibits any employee from using the skills and knowledge used or gained at your workplace for a set period of time after their employment, either by working for a competitor or by recruiting business from current clients. It is written into an employee's contract when they sign on with your company or when they leave your company.

Many employers add non-compete clauses to employee contracts. These clauses protect businesses but are controversial. Also, they may not be enforceable in all places.

Non-compete clauses are traditional at jobs where workers are highly skilled or do very specialized work. However, more and more businesses include non-compete clauses in contracts, even if employees' tasks are not technical. That is because the idea is to protect the business and any trade secrets or confidential information from being shared with competitors in the industry should employees switch jobs.

Why Is a Non-Compete Clause Important?

A non-compete clause protects your business. If you don't have a non-compete clause, you may see other companies, owned or staffed by previous employees, taking your business, using certain techniques or even having knowledge of confidential information.

Confidential information, sensitive business information, or a trade secret can be entitled to protection from the non-compete clause if the employer can show it took reasonable measures to keep the information secret and that information gives the employer a competitive advantage in the marketplace.

Goodwill for customer relations developed by an employer is considered an asset so employers can also use a non-competition agreement to prevent a former employee from using this goodwill and competing.

Legal Enforceability Across States

The enforceability of non-compete clauses varies significantly across the United States. Some jurisdictions, such as California, Oklahoma, and North Dakota, generally prohibit non-compete agreements except in very limited circumstances. Other states apply a “reasonableness” test, requiring the restriction to be limited in time, geographic scope, and subject matter. Courts often balance the employer’s interest in protecting its business with the employee’s right to pursue work and earn a livelihood. Employers should consult state-specific statutes and case law to determine whether a non-compete is likely to hold up in court.

Do Not Use a Non-Compete Clause If...

Do not use a non-compete clause if you don't have legal standing in your area. Some states or cities have laws in place that make non-compete clauses unenforceable, like California, except in certain cases.

Recent Federal Developments

In April 2024, the Federal Trade Commission (FTC) issued a nationwide rule banning non-compete clauses for most U.S. workers. The FTC determined that such agreements unfairly restrict employee mobility and suppress wages. However, the rule allows limited exceptions:

  • Senior executives earning above a certain threshold may still be subject to non-competes.
  • Non-competes tied to the sale of a business may remain valid.
    The rule is currently subject to legal challenges, but it signals a significant shift away from broad reliance on non-compete clauses. Employers should consider alternative agreements, such as non-solicitation and confidentiality provisions, to protect business interests.

Use a Non-Compete Clause If...

Use a non-compete clause if your company is in a highly competitive business, and you're worried about employees taking the specialized knowledge they gain elsewhere. This is particularly relevant for start-up employers, if worried former employees will form their own competitive business. There are downsides, however, as employees can feel disadvantaged from the outset.  

Typical situations where companies would use a non-compete clause

  • An employer just hired a new employee
  • An employer and employee are ending the relationship
  • A company and a consultant are ending the relationship
  • Two business parties are ending the relationship

Deadline

You will typically need employees to sign a contract with a non-compete clause before they leave your company. Non-compete clauses typically last for a few months to a year after the employee leaves your company.

Alternatives to Non-Compete Clauses

Given the increasing restrictions on enforceability, employers often turn to alternative agreements to safeguard their interests, including:

  • Non-solicitation agreements: Prevent former employees from poaching clients or staff.
  • Confidentiality or nondisclosure agreements (NDAs): Prohibit disclosure of trade secrets and sensitive information.
  • Intellectual property clauses: Ensure ownership of employee-created works remains with the company.
    These alternatives can provide robust protection while avoiding the legal challenges and employee resistance commonly associated with non-competes.

When You Use a Non-Compete Clause vs. When You Don't

If you use a non-compete clause, your employees will usually stay away from jobs where they would risk competing with your business to avoid breaking the contract. If they do not, you may be able to stop them by taking them to court for breaking it. However, if your former employee does not cave under legal pressure, you may find that the non-compete clause is very often legally unenforceable in many jurisdictions.

If you use a non-compete clause, be aware that word may get out to future employees. Some people may not apply to work at your company for fear it will harm their ultimate interests You may also suffer bad press, because some people believe non-compete clauses unfairly take advantage of employees. This is especially the case if your non-compete clause is written broadly, or without appropriate contractual requirements.

If you don't have employees sign a non-compete clause, they may use the skills they gained elsewhere. They may even start a new business to compete with yours. However, there may also be no change in the quality or quantity of your business' competition.

Common Mistakes

Many businesses think non-compete clauses are universally enforceable. In many areas (such as Oklahoma), they aren't, or they may only apply under certain conditions. Check your state's laws for how they handle non-compete clauses and if any special conditions apply.

You may also choose to only have some of your employees under non-compete clauses, such as extremely skilled or visible ones.

Non-compete clauses are usually struck down because they are not limited or reasonable. For example, if the clause is limited in time as to a year or two, that is more likely to be upheld than a clause without limitation. Geographic limitations can also be used to ensure the clause will be upheld. The key is reasonableness - non-competes must balance the needs of the employer to protect its business versus the needs of the employee to find good work in the future.

Examples of Reasonable vs. Unreasonable Clauses

Courts frequently strike down non-compete clauses that are overly broad. Examples include:

  • Unreasonable: A five-year ban preventing a software engineer from working in any technology-related job nationwide.
  • Reasonable: A one-year restriction preventing a sales manager from soliciting former clients within a 25-mile radius.
    Employers should draft clauses narrowly tailored to actual business needs. Specificity in job roles, geographic scope, and duration increases the likelihood of enforcement.

Steps to Create

To create a non-compete clause, you will need to write a contract for your employees to sign. You will need to keep a copy of the signed contract on every person's file. It is a good idea to publicize the agreement in your employee handbook.

You do not need witnesses to the signing nor do the signatures need to be notarized.

Industries Where Non-Competes Are Common

Non-compete clauses are most common in industries where specialized knowledge or trade secrets play a central role. These include:

  • Technology and software development
  • Finance and investment firms
  • Healthcare and pharmaceutical companies
  • Media, sales, and marketing roles with strong client relationships
    While employers in these industries may still attempt to use non-competes, many are shifting toward confidentiality and non-solicitation agreements due to the growing legal scrutiny.

Frequently Asked Questions

1. Are non-compete clauses still legal in the U.S.?

Their legality depends on state law, but in 2024 the FTC issued a rule banning most non-competes nationwide, with limited exceptions.

2. What happens if I break a non-compete clause?

You may face legal action, including injunctions or damages. However, if the clause is overly broad, courts may strike it down.

3. How long can a non-compete last?

Most enforceable clauses last between six months and two years. Longer durations are often deemed unreasonable unless tied to the sale of a business.

4. What can employers use instead of non-competes?

Employers often rely on NDAs, non-solicitation agreements, and intellectual property clauses as less restrictive alternatives.

5. Does the FTC rule apply to independent contractors?

Yes, the FTC rule covers most workers, including employees and independent contractors, though exceptions exist for senior executives and business sales.

If you're thinking about including a non-compete clause in the contracts you give your employees, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average of 14 years of experience including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.