How to Know Whether You Should Sign A Noncompete Agreement


According to the Bureau of Labor Statistics (BLS), the median number of years employees stay with their employers is 4.2. Even with fluctuations based on employees' age and their occupation, it's clear that many people have multiple jobs and employers throughout their lifetimes. With ever-increasing competition between employers, it's no surprise that companies embrace noncompete agreements (NCAs) as a way to keep employees and to protect proprietary information. In fact, a 2014 research study revealed that one in five workers were bound by noncompetes and about 40 percent of the workforce had signed a noncompete in the past.

As a job seeker who wants to be informed, here's what you need to know about noncompetes and whether or not you should agree to sign one.

What Is a Noncompete Agreement?

A noncompete is a contract between an employer and an employee that ensures that the employee cannot compete with their employer. NCAs may address situations in which employees decide to leave and start their own businesses, or in which a former employee wants to recruit current employees for a rival company. A noncompete usually applies over a specific time period and in a designated geographical area. For example, after you leave an employer, you may not be allowed to join a major competitor in the same city for twelve months.

Are Noncompetes Legal and Justified?

Various iterations of noncompetes have existed for years. Supporters insist that employers have the right to protect proprietary information, while opponents highlight the many instances in which employers take advantage of having all the leverage and require employees to sign noncompetes when they don't have to.

Traditionally, those in certain occupations (sales and engineering) and leadership positions were more likely to be asked to sign noncompetes as they are the ones with access to clients, sensitive information or customized training. In recent years, however, two big cases revealed that even temporary and low-wage workers can be asked to sign NCAs to secure employment. Such practices have been called manipulative and damaging to the employment prospects of those most vulnerable, which has led to efforts to ban NCAs.

How can you know whether a noncompete is justified in your case? The answer may largely depend on your state. California, Oklahoma and North Dakota, for example, do not enforce noncompetes, while others are making efforts to address the growing discontent. Several states, including Maryland and Massachusetts, have adopted laws that ban noncompetes in the case of low-wage or nonexempt employees, respectively. If you are targeting high-level positions or ones that require knowledge of proprietary information, you may need to sign an NCA. Since different states regard NCAs differently, however, you may want to familiarize yourself with the situation in your state. That's when a conversation with an attorney will come in handy.

What Does a Noncompete Look Like?

The main purpose of a noncompete agreement is to protect the business interests of a specific employer. Though noncompetes may look different across employers, and although the requirements for a reasonable noncompete vary across states, in general, NCAs may be harder to enforce when they:

1. Don't protect an employer's legitimate business interest: In the agreement, it should be clear what reasons the employer has for requiring the noncompete or how the noncompete protects their business. Those who oppose NCAs have argued that employers have used them to discourage employees from seeking other opportunities, even when there isn't a legitimate reason to do so. That's especially the case with low-income and low-skill workers who generally have no access to information and training that can jeopardize an employer's business interest when they leave.

2. They impose undue burden on employees: The time and geographical restrictions imposed by an NCA need to be reasonable to the extent that they don't result in lack of opportunities or even unemployment. The exact dates and physical area covered by the noncompete need to be clarified prior to signing the agreement, and they cannot prevent the employee from seeking growth and further career development. For example, if an employer operates in a specific city, they may not be allowed to prevent former employees from finding opportunities in other cities in that state. That said, what's reasonable varies by state.

3. They negatively impact the public: Reports and research coming from both academic institutions and government agencies have shown that restrictive NCAs adversely impact wage growth, job mobility and entrepreneurship, which in turn has a negative impact on the economy. To avoid such negative impacts, NCAs must have reasonable and well-specified restrictions.

How to Know When You Should Agree to Sign a Noncompete?

In theory, a reasonable noncompete could be beneficial to both employers and employees, and signing one may help you grow professionally within a certain industry. When employers are transparent and alert potential employees prior to accepting an offer that an NCA would be required, candidates have the opportunity to review and negotiate. In reality, however, job candidates are not familiar with noncompetes and often sign them without even knowing they've done so. Moreover, many employers introduce the noncompete after a candidate has accepted an offer, thus limiting their ability to reconsider and their power to negotiate.

To not be caught by surprise with a noncompete and to avoid personal and legal headaches down the road, I encourage you to make noncompetes part of your research of potential industries, employers and positions. Depending on your state, noncompetes may be enforceable or not and you want to be aware of what's within the law. If your target industry, employer or position does require that you sign a noncompete, you may want to consult with an attorney practicing in your state to make sure you understand what's asked of you and what you are responsible for should you leave that employer. Don't be afraid to negotiate the terms when a noncompete is presented. Don't sign without carefully reviewing the document and consulting with an attorney.

What Happens If You Break a Noncompete?

Breaking a noncompete even unintentionally can have a significant negative impact on you. A noncompete is a legal document and violating the terms specified in the one you have signed could lead to lawsuits, damage to your reputation, or problems with future employment. As such, it is vital that you read any documents before you sign them and talk to an expert when the terms aren't clear.

*Keep in mind that the above article is for general information only. Noncompetes are legal agreements and you want to consult with an attorney should you have additional questions about the legality and power of such agreements in your state of residence.