Caveats Before Signing a Non-Compete

Even if you’re not in the job market right now, you should pay attention to the growing pressure on employees to sign non-compete agreements. You might be confronted with a new non-compete form by your current employer when receiving a raise or promotion. Or you might be asked to sign one in order to get severance if you're fired.

More businesses are requiring non-competes—and enforcing them—even for non-corporate, non-executive jobs as a yoga instructor, camp counselor or office intern.

Employers who don't use non-competes should consider whether they should start doing so. It's free and easy to download lawyerly wording right off the internet. However, research has shown that non-competes limit job mobility, accelerate talent flight and discourage venture-capital investments in areas that enforce them.

Key Takeaways

  • A non-compete agreement, or a covenant not to compete, is a contract that companies ask employees to sign to protect their corporate interests. Violations can mean facing possible litigation.
  • A traditional non-compete stops an employee from working for a competitor in a certain geographical area for a certain amount of time after leaving the company.
  • A non-solicitation agreement prevents an employee from poaching customers, contracts or other employees from the company that first hired them.
  • A confidentiality agreement stops an employee from spreading information that the employer wants to keep private, such as product formulations or marketing plans.

Job Offer Paired With Non-Compete

Don't sign and accept on the spot—though chances are you will be tempted. Ask for a copy of the agreement to review while you think about the job offer and your starting date. You'll probably feel some pressure, but try to resist it.

Technology sector recruiters Winona Search Group put this observation on its blog: "As a candidate, you generally don't have the bargaining power that the employer has when it comes to non-competes. General objections to signing non-competes can end up being red flags for employers." Your response should be reasonable and informed, not a blanket "no."

"Which is why we talk the candidate through it," says Bryan Crigler, Winona Search Group's president. "We have legal support to review and evaluate the document and advise on particular situations." Often you can get a custom-tailored contract that works better for you.

Do You Need a Lawyer?

Not necessarily. If you feel you understand what’s at issue and are not confused by the wording of the document itself, and the contract seems fairly balanced, you may decide to sign on the line and hope for no problem.

But first, read the tips below, and be sure to keep a copy of whatever you sign, because you may need it if, for instance, you are considering changing jobs, or if the company that hired you is merged into another firm. Or if you are laid off.

Covenants Not to Compete

A "covenant not to compete," or non-compete contract, is governed by state rather than federal law. In general, they cover three aspects:

  1. Traditional non-competes prohibit the employee from joining competing businesses identified either by name or description, during a specified period of time and within a defined geographical area.
  2. Non-solicitation agreements bar approaching customers, poaching employees and/or wooing suppliers of the former employer.
  3. Confidentiality agreements (non-disclosures) prohibit using or revealing information the former employer wants to keep private, which may be product formulations, client lists, marketing plans, or some other proprietary information.

It's clear that what employers are worried about is protecting their businesses. But a non-compete may go too far in what it bans. Generally, a court's view of what is reasonable will rest on these five points:

  1. Potential harm to the employer. The employer has to establish this, not you.
  2. A specified time period. In the eyes of the court, three to six months for a yoga instructor might be reasonable, but as much as two years or even five years could be seen as appropriate for a key executive.
  3. Prohibited territory. Up to 10 miles away might be fine for a hair salon, but a three-state area could be acceptable for a sales manager.
  4. Impact on the employee. Will it deprive the employee of making a living or force a relocation in order to use their experience and skills? Some state courts weigh this point more heavily than others. Florida law—an outlier in this—prohibits even considering it in deciding non-compete cases.
  5. Interests of the general public. A covenant that severely stifles competition to the point of creating a monopoly might not be acceptable.

Courts will not honor provisions they deem "unreasonable"—a point you may make in negotiation. There is, however, wide variation state to state and even in what individual courtrooms enforce, so unless you have expert advice, it's safer not to expect this to protect you.

Non-compete contracts are often more restrictive for mid-to-upper level employees, but even a beginner can suffer by signing a broadly restrictive contract and should consider negotiating to narrow the terms.

Negotiating Your Contract

First, focus on what you want to accomplish. If the employer is a local small business and you are talking with the owner, ask about where the non-compete document came from. Did a lawyer prepare it for the business or was it downloaded from the internet? If it's a one-size-fits-all online form, discuss it point by point in the spirit of working out an agreement to your mutual benefit and eliminating excess baggage. To do that, of course, both parties have to know what their benefits or disadvantages are.

Try to determine what the company's real concerns are. A competitor hiring you away to pirate their client list, perhaps? A non-solicitation clause can cover that worry without the additional scope of the document. Is it that you'll leave to go to a competitor taking business secrets with you? Suggest that you sign a non-disclosure agreement but without the geographic limitation. Or you might argue to shorten the time period, for instance, by pointing out that with your student loans, you can't afford to be out of work for six months, but a six- to eight-week period seems fair. Try to add a sentence saying that if you are laid off through no fault of your own, the agreement no longer applies.

Contracts work two ways, binding both parties. Ask for assurance in the document that as you gain experience with the company, you will regularly be considered for raises and promotions, so that you are not stuck at your entry-level salary, trapped by a non-compete. Do not be reluctant to stick to plain language rather than legal-sounding terms you may not understand.

If the employer is a large corporation, chances are the document was prepared by a big-time legal department, but you can still make your case to the human resources officer or a company lawyer. And remember, it helps in any negotiation to know at what point you are willing to walk away from the deal.

Another time to consult an attorney: If you're asked to sign a non-compete as a condition of getting severance when you're being terminated. In fact, it's useful to get legal advice before signing anything during a layoff or termination.

The situation is, of course, even more delicate if the non-compete shows up when you're being offered a raise or promotion. Some states require that you receive something extra—more vacation, for example—if you're asked to sign such a clause when you're already an employee of a company. In that situation, too, it's worth taking the papers home and consulting an attorney before you sign.

Article Sources
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  1. Winona Search Group. "To Sign or Not to Sign … the Dreaded Non-Compete Clause."

  2. Center for American Progress. "State-by-State List of Key Protections From Exploitative Noncompete and No-Poaching Agreements," Pages 1-5.

  3. The Florida Legislature. "542.335 Valid Restraints of Trade or Commerce."

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