In recent years, non-compete clauses have ignited controversy over the ethical implications of restricting an employee's future work opportunities. But they do hold value for employers.
But, should your company use them?
This article will explain non-compete clauses, explore the components of a non-compete agreement, and examine the various legal frameworks governing their use across different countries.
What is a non-compete clause?
A non-compete clause is a legal agreement included in employment contracts or agreements to protect the interests of an employer. It restricts employees from working for a competitor or starting a similar business for a specified period after leaving their current job.
The purpose of a non-compete clause is to:
Protect trade secrets and confidential information: If an employee has access to confidential information such as customer lists or upcoming product designs, a non-compete clause can restrict their ability to use that information in a competing business or to share it with others.
Stop competition from stealing your ideas: Employees may also have access to proprietary information such as marketing strategies or new services — a non-compete provision prevents employees from sharing this information and giving your competitors an unfair advantage.
Prevent employees from leaving your business for a better offer: To prevent an employer from losing talent to competitors, a non-compete agreement can include a section that restricts employees’ post-employment activities.
Non-compete clauses are often used in highly competitive industries where employees have access to sensitive information or trade secrets. However, they aren’t universally legal.
When writing a new employee’s contract, it’s important to ask: are non-compete clauses enforceable in the area the individual works in? This can vary by country, or by state in the United States .
In what states are non-compete clauses banned?
While non-compete clauses are legal in many states, they remain a controversial topic in the US.
Some states have chosen to ban or restrict their use altogether due to concerns that non-compete provisions can limit an employee’s job mobility and can be seen as an unfair restraint on trade.
Therefore, it’s important to know the states that restrict and the states that still enforce non-compete agreements.
States where non-compete clauses are banned:
Minnesota
North Dakota
California
Oklahoma
Minnesota
New York has also passed legislation that will ban non-compete clauses to protect low-wage workers. However, this law has yet to be finalized.
States where non-compete clauses are restricted:
Illinois
Maryland
Oregon
Colorado
Maine
New Hampshire
Virginia
Rhode Island
Washington
Iowa
Kentucky
While many states still allow non-compete clauses to be enforced, it’s important to note there’s a growing resistance against them, and as a result, the number of states banning or restricting non-compete clauses has risen.
Understanding the complex ethics of non-compete clauses
Non-compete clauses are controversial.
On the one hand, employers argue that non-compete clauses are necessary to protect their trade secrets and to prevent employees from joining competitors.
They also argue non-compete clauses can attract and reassure investors and protect their investment in human capital. Some studies indicate the “value of human capital” comes from their “ tacit knowledge ” of workplaces and that if employees can freely move from one competitor to another, it can hurt businesses' confidentiality.
However, from an employee’s point of view, non-compete clauses can be seen as unfair, particularly if they’re loosely defined and prevent employees from working for any business in the industry.
Non-competes can make it difficult for employees to find new work opportunities, particularly if their skills are specific to one industry. Joe Biden remarked on February 2023 that “...30 million workers had to sign non-compete agreements when they took a job” and that these agreements stopped employees from taking jobs that offered higher pay rates and better opportunities, ultimately hurting them in the long run.
Additionally, it’s important to note the impact non-compete clauses have on the global economy and job market.
Some economists argue that non-competes can harm economic growth by stifling wage rates and employee mobility, while others believe they’re beneficial as they reduce labor turnover.
Some positives of non-compete clauses include:
Safeguard trade secrets and confidential information
Protect employers’ investments
Attract and reassure investors
Some negatives of non-compete clauses include:
Impact competition
Create an uneven power dynamic between employer and employee
Restrict employee mobility and innovation
Can discourage top talent from signing a contract with a company due to the limitations.
At its core, the ethics surrounding non-compete clauses are complex as they aim to protect business at the expense of limiting employees’ career opportunities.
While it’s important to keep your company’s intellectual property safe from competitors and unauthorized access, it’s equally critical to remember the moral responsibility you have to your employees.
As such, both prospective employers and prospective employees should carefully consider the implications of a non-compete clause before signing it. Also, policymakers need to assess the ethical implications of their use.
How does the Federal Trade Commission's proposed ban impact businesses?
On January 19, 2023, the Federal Trade Commission (FTC) proposed a new rule that would ban employers from using non-compete agreements across the United States.
This proposed ban would only impact the clauses that directly prohibit workers from being hired by a competing company, but it wouldn’t extend to contractors with fixed-term agreements . It would also allow for narrow exceptions, such as when a non-compete clause is necessary to protect highly confidential information for a company.
The FTC and Antitrust Division believe that non-competes disadvantage both employers and employees as they can make it difficult to attract and retain top talent and limit the competitiveness of the labor market.
If enacted, this rule would impact most businesses in the US with a few exceptions, such as companies in the financial services sector that handle highly sensitive information and a small number of nonprofits. The comment period closed on April 19, 2023, so now the FTC must review 16,459 comments and make changes to the rule if necessary.
The final rule is expected to be published in the Federal Register in early 2024. However, there are no guarantees. Once the rule is released, it’ll then take an additional 60 days to go into effect.
What’s typically included in a non-compete clause?
Non-compete clauses are typically used at the pre-employment stage of employment and need to be signed by the prospective employee before starting work with a company.
The clauses themselves are contained in the employment contract.
Non-compete provisions typically outline the scope and duration of the restrictions, as well as the specific activities the employee is prohibited from engaging in. However, they can be tailored to specific businesses and industries.
Non-compete clauses generally include:
Scope: the geographical area, industry, and duration of the non-compete clause, to specify where the employee is restricted from working and for how long
Prohibited activities: the specific activities the employee is prohibited from engaging in, such as soliciting clients or customers from their former employer or working for a direct competitor
Consideration: the compensation or benefit that the employee receives in exchange for agreeing to the non-compete clause, such as a signing bonus or stock option
Severability: the part that specifies what happens if one part of the non-compete clause is unenforceable
Governing law: the exact jurisdictions and laws that will govern the interpretation and enforcement of the non-compete clause
Non-compete clauses can be complex, and there are many factors to consider when drafting one for your future employee. Therefore, it’s important to speak with an HR professional and experienced lawyer to get personalized advice on your specific situation.
How can an employer go wrong with a non-compete clause?
There are several parts of a non-compete clause employers must carefully consider to ensure it’s legally sound and fair to both parties.
If an employer makes a non-compete clause too restrictive, it can be seen as a violation of an employee’s rights and may even be considered unenforceable by a court of law.
For example, in 2021, Amazon sued Carl Nelson , a former employee, for violating his non-compete agreement. However, Nelson fought against this claim, stating the agreement was “...unreasonably overboard, unenforceable, and in violation of Washington law.” That case is ongoing.
Here are some common mistakes employers can make:
Including overly broad restrictions: Non-compete clauses should be narrowly tailored to protect the employer’s legitimate business interests and to ensure it’s enforceable. For example, a non-compete clause that prohibits an employee from working in any capacity in the same industry for any company across the world is likely to be unenforceable.
Making the clause too long: A non-compete clause that’s for an excessive period, such as over two years, is likely to be viewed as unrealistic and overly restrictive.
Violating labor laws: Non-compete contracts must follow labor laws and regulations, such as anti-discriminatory laws. If they don’t, they may be unenforceable and expose you to legal liability.
Not having the employee sign the non-compete clause voluntarily: There must be evidence that the employee signed the non-compete clause voluntarily and without pressure from team members.
Failing to update the clause: Provisions should be reviewed and updated regularly to ensure relevancy and compliance with recent law amendments.
While non-compete clauses can be a valuable tool for employers, there are many pitfalls you must avoid to ensure you’re legally compliant and fair to your company as well as your employees.
Clauses that are fully legal but still overly restrictive can not only impact an employer’s ability to attract and retain talent , but also impact your reputation with future employees.
What happens if an employee violates a non-compete agreement?
The consequences of an employee violating a non-compete agreement vary depending on the country where your employee works and the specific terms of the agreement.
However, in general, an employee can take legal action against an employee who violates a non-compete agreement — such as suing for damages or seeking an injunction to prevent the employee from competing.
The specific legal remedies available to the employer will depend on the jurisdiction and language of the agreement. For example, in Australia, the maximum penalty for a civic breach of the Competition and Consumer Act 2010 is $50,000,000 .
When it comes to drafting and reviewing non-compete agreements, it’s best to seek legal advice from experienced professionals who know what they’re doing.
At Remote, we offer HR consulting services . Our experts can provide guidance on the legal requirements of various jurisdictions and help you ensure that your non-compete clauses are enforceable and fair to both parties.
A roadmap to how clauses work in different countries
If you’re considering using a non-compete clause in your employment contracts, it’s important to remember that these clauses look different across the globe.
It’s crucial to keep in mind the different laws and regulations surrounding non-compete clauses in each country and any updates that may impact your compliance.
Are they legal?
Typical duration of a clause?
United States
Varies
6-24 months
United Kingdom
Yes
3-12 months
Australia
Yes
12-24 months
Germany
Yes
6-24 months
Spain
Yes
6-24 months
Singapore
No
N/A
Non-compete clauses aren’t the only way to protect your business.
In fact, with the controversy surrounding it, as well as the proposed bill trying to stop non-compete clauses in the US, it might be time to look for an alternative approach.
Here are some alternatives:
Writing specific and detailed non-disclosure agreements (NDAs): These are contracts that prohibit the disclosure of confidential information such as customer lists or trade secrets. A well-drafted NDA is specific about what information is being protected and will have clear penalties for violating the agreement.
Drafting a non-solicit agreement: This stops an employee from soliciting customers or employees from their former employer after they leave.
Training employees about the importance of confidentiality: From the first stage of onboarding, make sure employees understand what information needs to be protected and the protocols you have in place about how to handle confidential information in the workplace.
In addition to these strategies, you can also take steps to build a strong company culture that discourages employees from leaving or competing with you.
This could come from offering competitive salaries and benefits , providing opportunities for advancement, and creating a positive work environment.
Remote can help you draft worker contracts that protect your company without restricting employees. We will base the contract on the country the worker is in and consider cultural factors that influence confidentiality.
How Remote can help protect your business
Protecting the confidentiality of your intellectual property, data, trade secrets, and other proprietary information are important considerations, particularly while hiring and terminating employees.
If you’re wondering about the best way to include non-compete clauses in employment contracts to protect your business without hindering employee mobility, Remote can help.
Our global HR services include employer of record and an HR management software that can help you manage the employee lifecycle from start to finish. Remote’s employment specialists have legal knowledge of local labor laws and can help you draft fully compliant agreements that are customized to your unique needs.
Get started with Remote today and find out how our HR experts can help protect your business!
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