What Is A Non-Compete Agreement? (Everything You Need To Know)

Summary. A non-compete agreement is a contract that prohibits an employee from beginning work with a company considered to be a competitor for a certain length of time after their termination. This agreement can also stop you from leaving the current company to start a competing company.

If you’ve been asked to sign a non-compete agreement, you probably have some questions about what exactly you’re agreeing to. According to the U.S. Treasury, non-compete agreements are “contracts between workers and firms that delay employees’ ability to work for competing firms.” They are primarily signed for the employer’s benefit, as they are used to make sure that their employees aren’t able to quit, get a position at a competing firm, and start spilling all their ex-employer’s secrets to their new employer. As to whether or not you must sign one, that will depend on you and your situation. Ultimately, no one can force you to sign anything that you don’t want to, but it may cost you your potential (or current) job if you are unwilling to agree to the terms.

Key Takeaways:

A non-compete agreement is a contract an employee signs with their employer that prevents the employee from leaving to work for a competitor or starting a competing company.
Non-compete agreements have limitations based on time, geography, and specific industries.
Non-compete agreements benefit the employer from losing their employees to competitors. Non-compete agreements also protect their trade secrets and customer base.
Non-compete agreements reduce the employee’s leverage at the company because they no longer have the ability to bargain with job offers from competitors.
Use legal counsel when possible if you are agreeing to or asking for a release from a non-compete agreement.

What Is a Non-Compete Agreement?

A non-compete agreement is a contract that prohibits an employee from beginning work with a company considered to be a competitor for a certain length of time after their termination. It also stops an employee from leaving to start a company that will directly compete with their current company. Keep in mind that most non-compete agreements will also specify, or only be enforceable, within a certain “reasonable” geographical area, so if you’re quitting and moving to a place far away from where your current company doesn’t do business, it shouldn’t matter if your new job is in the same field. For a non-compete agreement to be enforceable, it should lay out the following information:

A clear definition of what exactly constitutes “working for a competitor” (how restrictive the agreement is)
When the agreement will begin
What dates the employee will be disallowed from competing with the current company (the period of time)
Where the employee is barred from working (the geographical scope)
Why the agreement is necessary and legitimate
How the employee will be compensated for signing the agreement
Whether or not the agreement is enforceable if the employee is fired

Pros And Cons of a Non-Compete Agreement

Employers benefit the most from a non-compete agreement, simply due to the nature of the contract. However, there are potential benefits for an employee who signs a non-compete agreement, including:

Necessary to land a job. Your access to certain positions might hinge on your willingness to sign a non-compete agreement. It’s kind of a gray area if this can really be considered a “pro,” but if it’s the last hoop you need to jump through to get a dream job that you have no intention of leaving, then it’s a small price to pay.
May incentivize employer to go the extra mile with training. If an employer isn’t worried about their employee running off with trade secrets at any given moment, they might feel more comfortable investing more money into employee training. If you’re new to the job market or the field, then this training could prove invaluable.
More money. An employer may provide extra compensation to an employee who signs a non-compete agreement. This could take the form of higher wages, access to promotions, and higher levels of training.
In some cases, the agreement may require that the company provide long-term severance to a former employee who abides by the terms of the non-compete agreement. This policy is among those recommended by the Treasury Department because it encourages and preserves “socially valuable non-compete agreements.

Meanwhile, non-compete agreements exist to protect the employer, the pros of the agreement include:

Reduce employee turnover. If you’re an employee who’s signed a non-compete agreement, your ability to find a local job in the same field will be hindered.
That means that even if you’re unhappy with your current work situation, you’re pretty much stuck where you are unless you move states or change career paths. In some non-compete agreements, an employee may even be required to pay their employer back for their training costs, seeing as it’s considered valuable corporate information.
Protect trade secrets. This is the big reason non-compete agreements are a thing. Employers don’t want their employees running to their biggest competitor just down the street with oodles of information about their corporate strategy.
Situations like this can occur in any field, where a competitor could gain an extraordinary advantage by having access to information brought to it by a former employee.
Protect customer base. The danger is incredibly apparent in the sales field. For example, consider a scenario where an employee takes their whole client list as they’re quitting, and immediately starts poaching those clients at their next job.

Now there’s no doubt there are some cons to a non-compete agreement. Particularly for an employee, such disadvantages include:

Harder to get another job. No surprises here; if you’ve signed a non-compete agreement, your ability to land a job in the same field and geographic area is hindered. And for a considerable chunk of time as well, since typical non-compete agreements range from six months to two years.
Reduce worker’s leverage. Negotiating for a promotion, a higher salary, or extra perks is a lot easier if you walk into the office with an offer from another firm. With a non-compete agreement, your choice of firms that could potentially woo you away is reduced, and with it your bargaining power.
Can (sort of) be a trap. Nearly 40% of workers who sign a non-compete agreement are asked to do so after starting at the job. This is most likely after an employee has just turned down other opportunities and committed to their company, meaning they likely feel as if they have no choice but to sign at that point.

Just because the employer is the obvious beneficiary of a non-compete agreement, that doesn’t mean it doesn’t involve some risk for them as well. Potential cons for the employer include:

Hasten a current employee’s decision to leave: If a person has been working for a company for years, and is suddenly asked to sign a non-compete agreement, it might cause some backlash. They might decide that they want to start competing with the company immediately and quit their current position rather than sign a restrictive contract.
Scare off potential new-hires: A non-compete agreement may scare off some of the best talent applying for a job or cause them to reject your offer.
Unhappy employees stick around longer. If an employee is disgruntled and looking to change their company, they might feel trapped by a non-compete agreement. And they might stick around, doing subpar work, rather than face a legal battle just to switch their employer.
Potential legal battles. A contract is only as enforceable as a court agrees to. So if an employer has made their non-compete agreement unreasonably broad and restrictive, they might end up losing if they try to bring a former employee to court. This is especially true considering that courts generally favor employees in non-compete litigation.

Can I Be Denied A Job Or Fired For Refusing To Sign A Non-Compete Agreement?

The short answer is yes. The longer answer would depend on how reasonable the terms of the non-compete agreement are. Each case is different, and each state handles non-compete agreements differently, so seek legal counsel if you’re unsure.

In any case, read the terms of the agreement very carefully and don’t sign anything that you don’t feel comfortable agreeing to. The reasonableness of the proposed agreement is important in determining whether or not a company would be protected by the law in denying you a job.
In a case where you’re being asked to sign a non-compete agreement after having the job for a considerable length of time, things get a bit trickier. An employer might choose to fire an employee who fails to sign a non-compete agreement, but the employee would have more leverage in that they might have a solid wrongful termination case if their employer fires them.
It comes down to how reasonable the language of the agreement is. If they’re asking you to agree not to work in the industry, anywhere in the country, and for a ten-year period, you can be fully confident that you won’t be fired for failing to sign. And if they do fire you, you’d have a homerun wrongful termination case.
You can almost always negotiate the terms of a non-compete agreement. An employer can’t force you to sign it, so use that as leverage and get rid of or minimize terms that you feel are too restrictive. Things like geographic scope, length of time after termination, and the scope of “competitive activity” are all on the table.

What Are Legitimate Reasons An Employer May Use To Enforce A Non-Compete Agreement?

Depending on the specific contract that an employee signs, an employer may have a host of reasons for choosing to enforce their non-compete agreement. This includes:

You signed a non-compete agreement that was tight in its definition of competition (prohibited from working as a software developer within a 10-mile radius of the company, for a period of 6 months), then chances are they’ll be successful in enforcing the non-compete agreement.
You signed a non-compete agreement, then swiped your old client list and immediately started poaching clients with your insider knowledge of what your ex-company’s price points were, then yea, it’s pretty obvious you’ve broken the spirit and letter of the contract you signed.

Their ability to enforce it, however, depends on the specificity of the original agreement. If, for example, the contract is far too vague (prohibited from working in information technology, within the state of New York, for a 5-year period), they’ll have a much harder time getting a court to agree that you’ve broken the terms (because that language is clearly too broad and restrictive). Basically, a “legitimate reason” boils down to whatever the company thinks they can get away with, which should align with common sense. For less cut-and-dry cases, of which there are many, it’s a good idea to seek legal consultation before doing anything that might trigger the wrath of your ex-employer and land you in a pricey court case. If your employer sues you for breaching the non-compete agreement, they will go to court and seek an “injunction,” which is a restraining order to prevent you from violating your agreement. These cases are often expedited, so it may only be a matter of weeks before you have a hearing before a judge.

Does My Employer Have to Pay Me More in Exchange for a Non-Compete Agreement?

No, your employer does not have to you more in exchange for signing a non-compete agreement. Nothing is forcing an employer to pay you more for signing a non-compete agreement, just as nothing is forcing you to sign it. However, most employers will pay a “consideration,” which is additional compensation for the employee who agrees to the terms of the non-compete agreement. This can take the form of access to promotions, higher-level training, and straight-up higher wages. It can also be a part of your severance package when you’re leaving the company. Note that while this consideration is absolutely a good thing for the employee, it does come with a catch. Receiving consideration in exchange for signing the non-compete agreement means that courts will look more favorably at the employer if you end up in a legal battle. For example, if Company A had you sign a non-compete agreement and paid you a consideration for it, while Company B had you sign the exact same agreement but failed to pay you a consideration for it, Company A will be in a much better position to enforce the agreement down the road. Expectations and enforcement of these agreements vary considerably from state to state, so do your due diligence when it comes time to make this decision.

Questions You Should Ask While Negotiating a Non-Compete Agreement

To review, here are the most crucial questions that you get answered before signing a non-compete agreement. They should all be included within the language of the contract, so if any of these questions don’t have a clear answer within the text, make sure to hash that out and have it included in the final version that you’ll sign.

What opportunities are limited by the agreement? Specific roles, companies, or industries should be included in the agreement.
When does it expire? The agreement should clearly state the duration of the non-compete agreement.
Where am I prohibited from working? The geographic scope of the non-compete agreement should be laid out in specific, straightforward language.
What is the reason for the non-compete agreement? Ideally, the company should make it clear why there is a need for such a contract. The reasons they state might come into play if you’re trying to work around it in the future.
Does the non-compete agreement apply if I am fired? You should get a clear-cut answer to this question, in writing. Chances are it will apply even if you’re fired, but the enforceability of such a clause depends on the nature of your termination.
If you were fired because you wouldn’t go along with the illegal or discriminatory activity of your employer, courts will 100% side with you. If you were fired for turning up late every day and performing subpar work, then you’re a less sympathetic character. Nevertheless, courts generally favor allowing individuals to work freely and are less likely to enforce an agreement if the employer, instead of the employee, chose to end the relationship.

In general, your goal in negotiations is to reduce your future limitations as much as possible. Try to make the geographic scope smaller, the time period shorter, and the type of work more specific. This will allow you greater freedom if and when you do leave your company and want to stay in the same field.

Non-Compete Agreement FAQ

How do I get around a non-compete agreement?

The best way to get around a non-compete agreement is to ask for a release. To ask for a release, schedule a meeting with your current/former supervisor or appropriate HR personnel.
- Before the meeting, read over the terms of the non-compete clause of your contract carefully. Try to understand what “legitimate business interests” they are trying to protect so that you’ll be able to articulate how a new opportunity doesn’t break the spirit of the agreement.
- Consider what “trade secrets” you were privy to at your job and how you could potentially use those to further a competitor’s goals at the expense of your former employer. If you know what the company is concerned about, you’ll be in a better position to allay those fears.
- Once you’ve organized all pertinent information, you can attend the meeting and work out the details of your release. For example, you may agree that you won’t contact former clients, but can’t agree that you won’t apply the industry knowledge you picked up at your former job.
- Negotiating these terms will be much easier if you have a desired job in mind, as you’ll have the geographical location, new job scope, and other important factors ready when figuring out what aspects of your non-compete agreement you can be released from.
How serious is a non-compete agreement?

Non-compete agreements are as serious as any other legal contract that you can sign. Failing to comply with the terms of a non-compete agreement can have serious repercussions for your career, especially if you flagrantly and deliberately break the spirit and letter of the contract.
What happens if you break a non-compete agreement?

If you break a non-compete agreement and are caught, your former employer will file a lawsuit against you. This will likely result in a court hearing followed by a temporary injunction against you, and you’ll be forbidden from working with the competitor until the trial is complete.
In rare cases where the employee is obviously in the wrong, a judge may immediately order you to permanently stop working at the competitor or be held in contempt of court. If sued, you have 20 days to respond to the allegations. If you choose to fight it, you’ll have to address each of the allegations made against you in the lawsuit. It is highly advisable to hire an attorney at this point, as you stand almost no chance of competing with corporate lawyers on your own. You’ll have to participate in discovery, build a case, and fight it in court — all to continue working at a job with a competitor. During this time, you won’t be getting paid or allowed to work for this competitor. If you want to avoid a lengthy court battle, you can also seek mediation with a third party to reach a private settlement.
Are you bound by a non-compete agreement?

Yes, you are bound by a non-compete agreement. However, they only remain legally binding if the restrictions placed on you are reasonable and serve to protect the “legitimate business interests” of your former employer.