If you’ve been tuned into the news lately, you’re likely familiar with the term ‘noncompete agreement.’ Despite the term being used a lot in modern discourse, you may not have a full functioning knowledge of what a noncompete actually is. The Federal Trade Commission recently issued a rule banning noncompete clauses for a wide array of business ventures, estimated to impact over 30 million people. The ruling will render existing noncompetes relatively unenforceable, and prohibit major companies from issuing new ones, even for their high-ranking execs.
Luckily, if you haven’t signed one of these yourself in recent years, you likely don’t need to worry about them. Of course, it’s still good to be in the know, so you know your rights when beginning a new job, or executing a contract with another business. So, what is a noncompete? Does it impact your profession? And what are the pros and cons? Continue reading below to have all these questions and more answered, as we dive into the legal terminology, and simplify it for the average worker.
What Is A Noncompete Agreement?
Noncompete agreements are legal clauses which specify that an employee or contractor cannot enter into competition with their employer during or after their contract has ended. In essence, the clause is exactly what it sounds like, a contract stipulation which explicitly states that you can not compete with your employer. For instance, if you were to get a job as a programmer at Facebook with a one-year contract, you may be asked to sign a noncompete clause which states that you won’t take your insider knowledge of Facebook’s code to X (formerly Twitter) after your contract has concluded. Some more stringent noncompetes may prohibit you from working with another company within the tech industry at all for a number of months.
Most noncompete deals specify an exact length of time that an employee is meant to avoid spreading insider knowledge within their industry, usually billed at 6 months to a few years. In this time, the employer issuing the noncompete hopes that you will have either forgotten much of their trade secrets, or that the business has shifted fast enough to make your knowledge obsolete. Some places, like California, have already ceased to enforce noncompete agreements long before the FTC ruled them virtually unenforceable, proving that the legal clauses have already been getting phased out for some time.
Specific Agreements
While there is no real industry standard outline for a noncompete agreement, most of them tend to have the same general layout and demands. These can include scope of work, geographic location of a new job, and damages owed to the corporate entity if the contract is violated. In most instances, a noncompete will outline a stringent financial responsibility to employees, placing them on the hook for up to millions of dollars for infringing upon the agreement. Of course, as stated above, numerous states have begun refusing to enforce these contracts, essentially reducing their language to empty threats as a bargaining chip.
Noncompetes are mostly utilized in industries such as tech, finance, and big business, which rely heavily on the use of intellectual property or proprietary technology. If you’re reading this and thinking “I’ve been in the work force for over 30 years and I’ve never been asked to sign one,” it may be because your industry doesn’t often utilize them.
Why Are These Agreements Being Phased Out?
While noncompete agreements can be great for big corporations, they can often have an incredibly damaging impact on employees who sign them. These agreements have been known to weaken bargaining power for general employees, as they are not able to seek better-paying positions in their field after signing one. Furthermore, noncompete deals can stifle product innovation, as corporations who have access to the best tech are able to obfuscate their code from their competitors.
If two competing companies are constantly vying for the best product or service, they’ll be forced to bid for the best workers and workflow practices. When noncompete clauses get in the way of this bidding war, it allows one company to rise to the top, dwarfing their competition while employees reap few benefits of their company’s success. These agreements have already been slowly getting phased out at the state level for over a decade, with states such as Hawaii and Utah banning or limiting noncompetes throughout the 2010s.
Are There Any Upsides To Signing A Noncompete?
While noncompete agreements are generally bad for the worker, there are a few upsides which make it worthwhile to sign one. A noncompete often comes loaded with a clause that dictates employees will be compensated for their full contract term, regardless of their employment status. Essentially this means that, if your entire division becomes dissolved due to unforeseen circumstances, you will continue to be paid for months at a time without being required to show up or do any work. While these instances are rare, there are plenty of success stories from executives who once had a six-month windfall due to a noncompete clause, allowing them to focus on their family or building their own independent business while waiting out the terms of their agreement on the payroll.
Noncompetes can also help to reduce high rates of employee turnover, because it basically locks them into a fixed contract for an extended period. Historically speaking, signing a noncompete has not always been a positive move for employees, though the benefits for corporations are plentiful. Fortunately, all of this is null and void at this point, as the FTC has essentially voided all noncompete agreements within the United States. If your next employer prompts you to sign one, you can likely rest assured that the document will be completely unenforceable. Just be sure to check your specific state laws to confirm before making any rash decisions. And as always, consult with a lawyer if your paperwork doesn’t look up to snuff.
Who Is Impacted By The Ban?
According to the FTC, the only noncompete agreements that will remain enforceable following the new rules are those inked by fewer than 0.75 percent of the workforce, encompassing only senior level executives. Chances are, if you have a noncompete clause and haven’t already been assured that it will remain in place, your clause is already nullified. The FTC ban prevents corporations in every U.S. state from entering into any new noncompetes, meaning business owners seeking to protect their intellectual property will need to rely on other means such as an NDA.
Per the Federal Trade Commission‘s official website, NDA agreements are already in place for over 95 percent of all employees with noncompete agreements, and provide corporations with more than enough legal recourse to protect their sensitive data, without relying on noncompetes. The Commission has urged business owners to compete with their contemporaries based on the merit of their pay-scale and benefits, rather than relying on locking employees in with nondisclosure forms, improving morale and working conditions for all parties involved.
