Were you asked to sign a noncompete contract when you started your job or accepted a promotion? Many employers require employees to sign these agreements, which prevent the employee from starting a competing business or going to work for a competitor for a period of time after the employment relationship ends.
It’s easy to see why employers want employees not to compete: Getting the edge in the business world might require holding more market share than business rivals, selling more goods and services, or landing plum government contracts. By prohibiting employees from competing, employers try to maintain their advantage—and keep their practices and strategies to themselves.
As advantageous as these contracts can be for employers, they can really hamstring employees when it’s time to move on. If you’re considering changing jobs, or you’re being fired or laid off, you’ll need to know whether you signed a noncompete and what it requires. Your employer may also ask you to sign a noncompete in exchange for a severance package. (For more on this topic, see our article on severance agreements.)
What Noncompetes Require
A noncompete agreement is a contract between you and your employer. Typically, a noncompete prohibits you from going to work for a competing business or starting one of your own. A noncompete should define what a competitor is—for example, “an eco-friendly dry cleaners” or “a tax preparation service”. The contract should also spell out how long, and in what geographical area, the noncompete applies.
What Makes a Noncompete Enforceable
The laws on noncompete contracts vary from state to state. Most states enforce noncompete contracts as long as they meet certain standards spelled out in statutes and cases. In a few states, courts will not enforce noncompetes. In California, for example, it is illegal for an employer to require an employee to sign a noncompete agreement.
In most states, a noncompete will be enforced only if it meets requirements intended to ensure that it is fair and reasonable. These requirements vary from state to state, but generally a noncompete must be all of the following:
- Protective of the employer’s legitimate business interests. The employer must have a legitimate need that is met by requiring you to sign a noncompete. Often, this interest is protecting trade secrets, such as customer lists or manufacturing processes. An employer that requires every employee to sign a noncompete agreement, even those whose jobs don’t require specialized skills or knowledge, might not pass this test.
- Part of an exchange. For any contract to be valid, it must be two-sided: Each party must get something. In most states, a noncompete agreement is valid if you sign at the beginning of your employment because the employer is giving you something (a job) in exchange for your agreement. In some states, your employer must give you something more in exchange for signing a noncompete if you are already an employee—a promotion, bonus, or severance pay, for example.
- Limited in time. A court will likely find a noncompete contract to be unreasonable if it prohibits you from competing with your former employer forever. Time periods of six months to two years are usually enforceable. Longer periods might make the agreement invalid because it may be seen as too restrictive on your ability to find meaningful work.
- Limited in geographic scope. A noncompete agreement usually can't bar you from competing with your former employer anywhere in the country or the world. Specific market areas may be protected, however. For example, if your employer sells or distributes its goods or services throughout a 25-mile radius of the business, a noncompete limited to that area is more likely to be found valid.
- Limited in type of work. If an employer restricts the type of work you may do so narrowly that you will have trouble finding a new job, that noncompete may be struck down, particularly if the work you perform does not require specialized knowledge. If you worked as a mechanic specializing in installing a particular replacement part on luxury vehicles, for example, your employer may be able to prohibit you from performing that job for its only local competitor. But, it would have more trouble getting a court to enforce a noncompete that prohibited you from taking any mechanic job.
If you’ve signed a noncompete, and your former employer believes you are violating the contract, it can sue you to stop you from competing. If a court determines that your noncompete contract is too restrictive, state law determines how the court will proceed. In some states, the court can revise the contract and enforce a less restrictive version. For example, a contract that bars you from working in your field anywhere in the state may be changed to restrict you from working in the city where your former employer is based.
This isn't the practice everywhere, however. In some states, the courts are not allowed to change the contract. In these states, if the contract is too restrictive, it will be held invalid and you will be free to do what you wish.
Penalties for Violating a Noncompete Agreement
A noncompete agreement is a contract, and if you break or "breach" it, your former employer can sue you for damages. If this happens, it can be costly for you, your new employer, or both. Your old employer may file a lawsuit against you alone if you started working for a competitor or started your own competing business. Or, your former employer may file a lawsuit against you and your new employer, especially if you share trade secrets—specialized knowledge or information that gives your former employer a business edge and that it took pains to keep confidential—with your new employer. (For more on trade secrets, see our article on nondisclosure agreements.)
If you lose the lawsuit, you might have to pay your former employer for revenue it lost because of your breach, such as lost sales. You may also have to pay the former employer any profits you made by using its trade secrets. These types of damages, however, may be difficult for your former employer to prove. Because of this, many noncompete contracts require you to pay liquidated damages: a set dollar amount, stated in the contract, which you agree to pay in the event you breach the agreement. The contract may also require you to pay your former employer’s attorneys’ fees and court costs.
Questions for Your Attorney
- A company wants to hire me away from my current employer, and it's offering to pay any damages that might arise if my current employer tries to enforce a noncompete agreement I signed. Should I go along with this?
- I was told I have to sign a noncompete agreement if I want a job; is this legal?
- Is the noncompete agreement I signed with my current employer enforceable against me in another state?