Key Takeaways:

  • State-Specific Enforcement: Non-compete agreements are governed by state laws, meaning enforceability varies widely. Some states strictly limit or ban them.
  • Federal Regulatory Changes: The Federal Trade Commission (FTC) has proposed a rule to ban most non-compete agreements, but enforcement remains uncertain due to ongoing legal challenges.
  • Consideration Requirement: Many states require employees to receive compensation or another benefit in exchange for signing a non-compete.
  • Geographic and Time Limitations: Agreements must be reasonable in scope; overly broad restrictions on time or location are often invalidated.
  • Alternative Clauses: Companies may use non-solicitation or confidentiality agreements instead of non-competes, as these are more likely to be enforced.
  • Exceptions for Business Sales: Courts are more likely to enforce non-competes signed as part of the sale of a business.
  • Growing State Restrictions: States such as California, North Dakota, and Oklahoma ban most non-competes, while others impose strict limitations.
  • Employer Responsibility: Employers must ensure non-competes are drafted in compliance with applicable laws to avoid legal disputes.

Non-compete enforceability depends on the extent of the agreement and whether it will legally hold up if challenged in court. This type of agreement is made between an employee and an employer and states that the employee will not work for any competitors for a specified time period after leaving the original employer. Non-compete agreements are governed by state law and thus may be enforceable in one state but not in another. In most cases, these agreements are subject to the laws of the state where the employee works.

In addition to restricting where employees can work after they leave the company, non-compete agreements also govern protection of the company's trade secrets. This may include sales strategies, product information, and client lists. 

Non-compete agreements must be signed by all parties and limit restriction to a reasonable period, often two years. However, the broad nature of the restrictions in this type of contract is often unenforceable. Some non-compete agreements are useless as they will not be held up by the court, while others effectively protect the employer's interest and help retain valuable employees.

Enforceability of Non-Compete Agreements

Before drafting or signing a non-compete agreement, familiarize yourself with applicable state laws--both those where the work will take place and those where the employer is headquartered. For example, unless they relate to selling a business, non-compete agreements are not legal in California.

In most states, the non-compete agreement cannot be enforced unless the employee receives a payment or benefit in exchange for signing it. Some states only enforce trade secret protection but invalidate work restrictions. About 33 percent of states restrict non-compete agreements and do not enforce them because they prevent individuals from being able to work for a living and support themselves. The employer has the burden of proof to show that the restrictions it has placed on the employee are reasonable. 

The states that are most restrictive to non-compete agreements include:

  • Louisiana
  • California
  • Florida
  • Michigan
  • Oregon
  • Alabama

Even in states where non-compete agreements are often enforced, the court limits the restrictions to what the employer can prove is reasonable. Some states will not modify the agreement but simply invalidate it.

Non-solicitation clauses in a non-compete agreement cannot be enforced unless the unauthorized use of trade secrets is involved. In addition to the states listed above, these clauses are unenforceable in:

  • Montana
  • North Dakota
  • Colorado
  • Oklahoma

Non-solicitation clauses that are enforced must limit the employee from doing similar work to the work they did for the employer; clauses restricting all type of work are usually judged by the court as overly broad.

In most states, trade secrets are only protected if the employer can prove they are truly secret and not available from another source. Geographic restrictions are typically not enforced if they go beyond the area where the employee formerly worked for the employer. 

In California, an employee fired for refusing to sign a non-compete agreement may be able to sue the employer for wrongful termination and unfair trade practices. Employers must be sure that an agreement is lawful before asking employees to sign. Restrictions should be limited to those necessary to protect the business and should be appropriate for the person's role.

FTC’s Proposed Ban on Non-Compete Agreements

The Federal Trade Commission (FTC) has proposed a nationwide ban on non-compete agreements, arguing that they unfairly limit worker mobility and wage growth. However, enforcement remains uncertain due to legal challenges. A recent federal court ruling temporarily halted the FTC’s ability to enforce this rule, and the matter is still under appeal.

While the FTC’s rule is in legal limbo, some states have proactively restricted non-competes, particularly for lower-wage workers. Employers should monitor legal developments closely, as future rulings could significantly impact enforceability.

State-Specific Laws Governing Non-Competes

The enforceability of non-compete agreements depends on the state where the employee works. Several states, including California, North Dakota, and Oklahoma, outright prohibit most non-competes. Others, such as Illinois, Washington, and Oregon, impose strict income thresholds, only allowing non-competes for higher-wage employees.

A few states, including Florida and Texas, are more favorable toward enforcing non-competes, provided they meet reasonable scope and duration requirements. However, some courts will modify overly broad agreements rather than invalidate them completely.

For multi-state employers, it is crucial to tailor non-compete agreements to the applicable state laws, as a one-size-fits-all approach may lead to unenforceability.

Common Mistakes Companies Make with Non-Compete Agreements

  • The agreement has no consideration and is thus unenforceable. Consideration means the employee must receive a benefit for signing the agreement. This must be something of value such as a raise or bonus, a higher job title, or a specific benefit.
  • The agreement is not enforceable because the time period it covers is too long. The period considered reasonable varies by state but typically ranges from 6 months to two years. Longer agreements will likely be found invalid.
  • The territory covered by the agreement is too large. The area restricted by the non-compete agreement must be deemed reasonable by the court.
  • The same non-compete agreement is used for every employee, or a standard agreement is used without modification for the specific business or industry.
  • One party purchases a business without having the person who is selling you the business sign a non-compete agreement.
  • Failure to include an assigning clause that transfers the agreement if the business is sold again.

Alternatives to Non-Compete Agreements

Given the increasing restrictions on non-competes, employers may consider alternative agreements that offer legal protection without violating state laws. Some common alternatives include:

  • Non-Solicitation Agreements: Prevent former employees from poaching clients, customers, or key personnel.
  • Confidentiality Agreements: Protect proprietary business information, trade secrets, and client lists without restricting employment opportunities.
  • Garden Leave Clauses: Require employees to remain on the payroll for a period after resigning while being restricted from working for competitors.
  • Training Repayment Agreements: Require employees to reimburse the company for costly training if they leave within a certain timeframe.

By utilizing these alternatives, businesses can safeguard their interests while complying with evolving state and federal regulations.

FAQs

1. Are non-compete agreements enforceable in all states?

No, enforceability depends on state laws. Some states, like California, ban most non-competes, while others, like Texas, allow them under strict conditions.

2. What makes a non-compete agreement unenforceable?

A non-compete may be invalid if it is overly broad in duration, geographic scope, or job restrictions, or if the employee does not receive adequate consideration for signing it.

3. What alternatives can employers use instead of non-competes?

Employers can use non-solicitation agreements, confidentiality agreements, or training repayment clauses to protect business interests without imposing employment restrictions.

4. Has the FTC banned non-compete agreements?

The FTC has proposed a ban, but a federal court has blocked it for now. The rule is under appeal, and its enforceability remains uncertain.

5. How long can a non-compete agreement last?

Most courts consider non-compete agreements valid for six months to two years, with anything longer often deemed unreasonable.

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