What Is a Noncompete Contract?
Understand how noncompete clauses can change a person’s career – and how to fight them.
Within the U.S. workforce, researchers estimate that nearly 30 million workers are bound by noncompete contracts that prevent employees from holding jobs where they would compete against their former employers. Approximately 38% of Americans will have a “noncompete” (as they’re referred to in legal parlance) at some point in their careers.
In May 2023, the U.S. Government Accountability Office reviewed the impact of noncompetes, finding evidence that few employees negotiate or reject these contracts, and many workers don’t fully understand the provisions. Jurisdictions with more noncompete enforcement have lower job mobility, reduced wages and lower entrepreneurship.
Concerned about the impact these agreements have on workers, dozens of states regulate these contracts in some way. Four states – California, Minnesota, North Dakota and Oklahoma – have outlawed these contracts, and New York may soon, as well. And the Federal Trade Commission is considering a national ban on noncompete contracts. The FTC estimates that ending noncompetes could increase American wages by $300 billion each year.
What Is a Noncompete Contract?
A noncompete contract is an agreement not to compete with your employer, whether you start a competing business or begin working for an existing competitor.
While states’ laws differ, generally speaking, to be enforceable, a noncompete contract should have limitations by geography (for example, a distance from a former employer’s location) and specified time periods (often less than 24 months). It needs to relate to the employer’s business, and the limitations can’t be unduly burdensome.
That’s where things get complicated.
“It’s always going to be a question of how reasonable, how much restraint on free trade” should be allowed, says David Partlett, Ada Griggs Candler Professor of Law Emeritus at Emory Law School.
Why Noncompetes Are Controversial
Even though they shouldn’t prevent someone from earning a living, noncompetes can effectively force people to change careers or move to a new location.
Noncompetes are frequently justified on the grounds that companies must protect their trade secrets and proprietary knowledge, and when two parties are of equal bargaining power, a noncompetition agreement benefits both of them.
However, when it comes to employees’ contracts, “you’re the weak party. There’s no equal bargaining,” Partlett says. Therefore, for some employers, noncompetes are less about their trade secrets and more about intimidating employees, so they won’t quit their jobs.
Noncompetes are effectively a tax on employees since they bear the cost of fighting unconscionable contracts, says W. Andrew Arnold, an attorney who represents employees in noncompete-related litigation in Greenville, South Carolina.
“Even if you sign a contract that’s on its face unenforceable, you still have to hire a lawyer and show the judge that it’s unenforceable,” Arnold says.
How Companies Find Out Someone Violated a Noncompete Contract
Workers are often caught violating a noncompete contract when they email something to their home account, Arnold says.
He explains that, before people leave a job, they email themselves a chart, a list of contacts, a corporate cheat sheet or other information. They may not have intended to use it against their employer. But it doesn’t matter.
“People who do that get a claim that they’ve essentially stolen a trade secret,” he says.
Companies often analyze employees’ computers after they leave and find those transmissions. Soon the employee receives a subpoena demanding they turn over their home computer.
Common Noncompete Loopholes That Help and Hurt Employees
When reviewing a noncompete, Arnold begins by studying its geographic limitation. For instance, many contracts bar employees from doing business within a given radius of an employer’s facility. But customers are usually concentrated in areas, so the radius may be overbroad. If so, it’s invalid.
Arnold looks for provisions when employers prohibit solicitations to anyone who was a client within a set time period. Courts may invalidate these because they prevent someone from approaching former clients as well as current ones.
But contracts often also limit employees’ ability to protest the contract, Partlett says. Contracts may require employees to forfeit their right to sue an employer and agree to go to arbitration, where employers have lower costs in challenging claims and there is no public record of the result.
If a contract contains a severability clause, anything unenforceable is forgotten but the rest remains in force.
For example, an employer might prohibit an employee from working in their field “anywhere in the world, the United States, the state and a neighborhood in Greenville,” Arnold says.
If there’s a severability clause, and an employee challenges it in court, a judge will likely limit the contract to that corner of Greenville. But it’s worth the risk. Because if the employee doesn’t sue, the employer gets the world.
Source: U.S. News