Non-compete agreements: what employers need to know

Executive overview

Former employees can take proprietary information, processes, and competitive advantages to rivals — or use them to start competing businesses. Non-compete agreements are the primary legal tool to prevent this, but poorly drafted ones invite lawsuits rather than protection.

The right non-compete is narrow, time-limited, and state-compliant — or it becomes a liability.

Components of a non-compete

• Duration: maximum two years; shorter is often sufficient
• Geography: restrict only the radius where competition is realistic; remote work makes location clauses increasingly irrelevant
• Scope: specify the exact information, procedures, and practices the employee cannot use elsewhere
• Competitors: define restricted industries and job types — not necessarily individual companies
• Damages: state the financial penalty for breach

Legal boundaries and state rules

• Three states prohibit non-competes entirely: North Dakota, Oklahoma, California
• Hawaii bans them for high-tech employees
• Utah caps duration at one year
• Check your state's specific rules before drafting any agreement
• Hire a lawyer — compliance is the only way to avoid liability
• The FTC has been considering a federal ban; monitor developments and have a contingency plan

Pros and cons

Pros

• Protects proprietary information and trade secrets
• Maintains competitive advantage after employees leave
• Attracts candidates seeking long-term roles

Cons

• Reduces employee bargaining power, which can deter strong candidates
• Asking someone to commit before they've experienced the company culture is a hard sell
• Overbroad agreements trigger lawsuits

Implementation guidance

• Add non-compete sign-off as a stage in the hiring process so candidates know upfront
• Store signed agreements in a compliance system so updates can be re-issued and re-signed easily
• Ask two questions before implementing: do we need one, and are we legally permitted to use one in this state?
• Keep restrictions to what is genuinely necessary — the goal is business protection, not punishing departing employees