What Are Non-Compete Agreements For?

Signing a new employment contract is an exciting step, especially when it’s for a leadership role. But amidst the details of salary and benefits, you might find a clause that gives you pause: a non-compete agreement. These agreements are common yet often misunderstood. What exactly are they for, and what do they mean for your career path?

Understanding the purpose and limitations of non-compete agreements is crucial for any professional. These legal documents can significantly impact your future employment opportunities, placing restrictions on where you can work and what you can do after leaving a company. For executives and key employees, the stakes are even higher.

At Barrett & Farahany, our employment law attorneys navigate the complexities of executive compensation, including the negotiation and review of non-compete agreements. We help professionals protect their interests and ensure their employment terms are fair and equitable. Our guide will explain why employers use these agreements, their current legal status, and what you need to know to protect your career.

Why Employers Use Non-Compete Agreements

Employers implement non-compete agreements for several strategic reasons, all centered on protecting their business interests. While they can feel restrictive to an employee, understanding the employer’s perspective is the first step in navigating them effectively.

Here are the primary motivations behind these clauses:

• Protecting Proprietary Information: This is the most common reason. Companies invest heavily in developing unique processes, client lists, marketing strategies, and trade secrets. A non-compete agreement is designed to prevent a departing employee from taking this sensitive information to a direct competitor, where it could be used to undermine the former employer’s market position.
• Reducing Employee Turnover: High turnover can be costly and disruptive. By making it more difficult for employees to jump to a competing firm, companies aim to increase stability within their workforce. This is particularly true for roles that require extensive training or have access to critical business intelligence.
• Incentivizing Investment in Training: When an employer knows an employee is less likely to leave for a competitor, they may be more willing to invest in training and professional development. The non-compete provides some assurance that this investment won’t immediately benefit a rival company.
• Maintaining Market Position: In highly competitive industries, losing a key employee to a rival can mean losing market share. Non-competes are a tool to prevent former employees from leveraging their inside knowledge and relationships to directly compete against the business that helped them build their expertise.

For example, a software company might require a lead developer to sign a non-compete to prevent them from joining a rival and building a similar product using proprietary code. Similarly, a sales executive with deep client relationships might be restricted from working for a competitor in the same territory for a set period.

The Shifting Legal Landscape of Non-Competes

The enforceability of non-compete agreements is not uniform across the United States. Legal standards vary significantly from one state to another, and the overall trend is toward greater employee protection.

Federal Developments

In April 2024, the Federal Trade Commission (FTC) announced a final rule that would ban most new and existing non-compete agreements nationwide. The goal was to promote worker mobility and increase competition. 

However, this rule was quickly challenged in federal court and is currently blocked from taking effect. The future of a federal ban remains uncertain, meaning state laws continue to be the primary authority on this issue.

State-Level Rules and Restrictions

State laws on non-compete agreements fall into a wide spectrum:

• States with Bans: A growing number of states have banned non-competes for most employees. These include California, Minnesota, North Dakota, and Oklahoma. In these states, such agreements are generally void, with narrow exceptions, such as in the sale of a business.
• States with Restrictions: Many other states permit non-competes but impose significant restrictions. These often include salary thresholds, meaning the agreements are only enforceable for higher-earning employees. Other limitations may relate to the employee’s role or industry.
• States with a “Reasonableness” Test: In states where non-competes are permitted, courts typically require them to be “reasonable” to be enforceable. This means the agreement must be narrowly tailored to protect a legitimate business interest and not overly burdensome on the employee’s ability to earn a living.

Courts generally evaluate reasonableness based on three factors:

1. Time: The duration of the restriction (e.g., one year is often seen as more reasonable than five years).
2. Geography: The geographic area covered by the restriction. A nationwide ban is less likely to be enforced than one limited to a specific city or region where the company operates.
3. Scope of Activity: The types of work or industries the employee is restricted from entering.

Because the laws are constantly evolving, it’s a mistake to assume a non-compete agreement is automatically invalid.

Key Considerations for Employees

If you’re presented with a non-compete agreement, don’t sign it without careful review. Here are critical steps to take:

• Review the Scope and Terms: Read the agreement carefully. How long do the restrictions last? What geographic area does it cover? What specific companies or industries are you barred from joining? If the terms are vague or overly broad, they may be unenforceable.
• Understand the Limitations: Consider how the agreement could impact your career goals. Would it prevent you from working in your chosen field or geographic area? Assess the practical consequences before you commit.
• Seek Legal Counsel: An experienced employment law attorney can review the agreement, explain its implications, and advise you on its enforceability under your state’s laws. This is the most important step you can take to protect yourself.
• Attempt to Negotiate: Non-compete terms are not always set in stone. You may be able to negotiate a narrower scope, a shorter duration, or a “carve-out” for certain companies or roles. An attorney can help you identify reasonable requests and negotiate on your behalf.

Your Partner in Employment Law

Navigating non-compete agreements and other complex aspects of executive compensation requires specialized knowledge. The attorneys at Barrett & Farahany are dedicated to advocating for professionals in Atlanta and beyond. We provide experienced legal guidance on contract negotiations, severance agreements, and disputes over employee restrictions. Our goal is to ensure your employment contracts are fair, equitable, and aligned with your long-term career aspirations.

Don’t let a confusing contract dictate your future. If you are facing a non-compete agreement or have questions about your employment terms, we are here to help you understand your rights and options. Contact the experienced employment law team at Barrett & Farahany today for a consultation. Let us help you navigate your career with confidence and clarity.