What is a Non-Compete Agreement?

Although nearly 40 percent of Americans have signed a non-compete agreement at one time or another—and about 18 percent of the nation’s workforce are bound by non-compete agreements at any given moment—few employees have a clear understanding of the potential ramifications of such an agreement.

Only about 10 percent of employees who have signed a non-compete agreement have attempted to have the agreement voided. In fact, most assume they have no legal basis to do so, or don’t want to create ill-will with a current or former employer. Even so, non-compete agreement disputes are becoming more frequent, primarily due to the limited amount of new jobs, and the number of workers being laid off. Economists have found that during times of economic plenty as well as during economic downturns, there are more incentives for employee disloyalty.

What is the Goal of a Non-Compete Agreement?

The primary underlying goal of a non-compete agreement (from the employer’s side) is to protect company trade secrets and customer relationships. Employers receive additional benefits from non-compete agreements as employee turnover is significantly reduced, and the company gains leverage in future employee negotiations. Any employee who is asked to sign a non-compete agreement should have a full understanding of what they could potentially be giving away, while society as a whole, should be asking how non-compete agreements affect economic growth, job mobility, business dynamics and the overall welfare of workers.

Which Industries Implement Non-Compete Agreements?

A large-scale University of Michigan study found that non-compete agreements are most prevalent in “information” fields, including architecture and engineering. Finance and engineering industries also favor non-compete agreements, with retail trade, food services industries and construction industries being the least likely to require employees to sign a non-compete agreement.

Non-compete agreements are more commonly found among employees with higher levels of education—and correspondingly, higher salaries. Despite this, the sandwich company, Jimmy John’s, made headlines for requiring employees to sign a non-compete agreement restricting sandwich makers from moving to a competitive sandwich-making company. (Only about 3 percent of food service employees are asked to sign a non-compete agreement).

Is a Non-Compete Agreement the Same as a Trade Secret Contract?

When an employee signs a non-compete agreement, they are agreeing not to work for a rival company if they quit. Non-compete agreements often include trade secret provisions, nondisclosure agreements or confidentiality agreements. The non-compete agreement offers employers the greatest protection—for a limited time—while a non-disclosure agreement or trade secret contract typically lasts as long as the trade secret exists.

Why Do Employers Push for Non-Compete Agreements?

You may wonder why employers push so hard to have their workers sign non-compete agreements. Employers face an increasingly mobile workforce, and a society that no longer attaches any stigma to those who change jobs often. And, in fact, nearly half of all employees admit to taking company information with them when they leave. While there are obviously really big trade secrets—Colonel Sanders secret spice recipe, or what goes into Coca-Cola, as examples—any trade secret which could potentially provide value to another company can fall under a non-compete agreement.

How Non-Compete Agreements Differ Across the Nation

Because there are no federal laws regarding non-compete agreements, every state has their own laws regarding these agreements. The state of California pretty much refuses to enforce non-compete agreements, favoring employee mobility above the protection of employee information. Florida, on the other end of the spectrum, favors employer protection above employee mobility.

How does Utah compare? Utah passed a controversial bill in 2016 which regulates the use of non-compete agreements in the state. While House Bill 251 stopped short of banning non-compete agreements, it placed restrictions on such agreements, preventing either employee or employer from entering into a non-compete agreement lasting more than one year.

What Makes a Good Non-Compete Agreement?

For a court to uphold a non-compete agreement, it must:

  1. Protect the legitimate business interests of the employee,
  2. Be considered “reasonable,” both in geography and in time, and
  3. Be supported by consideration for the employee at the time the agreement is signed.

As to the third requirement, the employee must receive something of value in return for his or her promise to refrain from competition. If the employee signs the non-compete agreement at the beginning of his or her employment, then the employment itself can be the “consideration.”  In some states, continued employment can be adequate value to support the agreement.  As of this writing, a bill in the Utah legislature seeks to require additional consideration to support a non-compete agreement imposed on an existing employee.

Further, when courts are asked to determine whether a non-compete agreement is valid, they will look to the issue of “reasonableness,” both in duration and in scope. The court will balance the employer’s legitimate business interests against the restrictions the agreement places on the worker’s future job prospects.

Non-compete agreements can be tricky, and there are many misperceptions in the marketplace.  If you have questions about whether your non-compete agreement will stand up in court, it is wise to seek advice from a qualified lawyer.

For questions or more information about non-compete agreements, please contact SCM attorney Keith A. Call.

Keith A. Call