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.
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:
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.
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:
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:
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.
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:
Some negatives of non-compete clauses include:
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.
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.
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:
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.
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:
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.
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.
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.
Typical duration of a clause?