An NCA is an employee document outlining the rules for working for a competing company upon termination.
Non-compete Agreement: Small Business Guide + Free Template
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Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.
Jennifer Soper is an HR Specialist and staff writer for Fit Small Business, with over 15 years of experience in accounting, payroll, and human resources.
This article is part of a larger series on Hiring.
A non-compete agreement (NCA) safeguards a business’s assets and competitive interests by preventing current employees or other associates, like clients or partners, from seeking similar employment or starting similar businesses and taking customers with them.
The agreement, or contract, is also used by a business when it has a unique or well-performing product, service, or sales platform that could be depreciated with departing employees. Every NCA requires unique, specific, and detailed information about what the company wishes to protect and what the employee is being asked to agree to.
Start with our free non-compete agreement template and customize it to your specific business needs:
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If you are in need of employment templates, like a non-compete agreement, consider using an all-in-one HR software like Gusto.
What to Include in a Non-compete Agreement
To maintain a detailed and legally binding non-compete agreement, it should include certain things.
- Restricted Business: Clearly define in your agreement the details and activity that relate to your business that you wish to protect.
- Restricted Territory: Your agreement should define the exact territory that is off limits should an employee leave your organization to seek employment elsewhere.
- Restricted Period: Your agreement should clearly state the timeframe it will be in effect.
- Consideration: Make sure you have a consideration clause in your agreement that supports your employee. A consideration clause spells out the terms and conditions of payment in exchange for mutual consideration.
- Restrictions: A good restrictions guideline lets the employee know they are not allowed to conduct similar business activities outside of your organization.
- Exceptions: Any exceptions to your agreement should be listed.
- Non-solicitation: Include verbiage to expressly forbid any employee from soliciting outside work from any other employee, client, or customer.
- Confidentiality and Non-disclosure: Your agreement should state that no employee is permitted to disclose any confidential information or trade secrets to any source outside of the company.
- Return of Property: If your employees are given company property during their employment (i.e., company computer, company vehicle), provide details on the explicit return of such property upon departure from the company.
- General Provision: This section should state any provision or legal remedies incurred as a result of a breach of contract.
- Acknowledgment: The bottom of your agreement should have a section for the signature and date of both the employee and the company representative.
When to Use a Non-compete Agreement
In general, having a non-compete agreement is becoming more common as competition for customers increases and the entrepreneurial spirit of young employees grows stronger. However, if you are still wondering if an NCA is needed for your business, it is wise to check your state laws or with an attorney (we’ll cover state laws in the section below).
If you answer “yes” to any of the following questions, you should consider having a non-compete agreement signed by all of your employees.
- Do you run a client- or customer-based business?
- Do you worry that your employees will try to open a similar business?
- Do you worry that your employees may be trying to see your clients on the side or telling them they would charge them less?
- Do a lot of your employees have their own businesses on the side?
Different types of companies and positions within a company may need non-compete agreements as well. For example:
- Boutique marketing firm: You may need an NCA in this situation because your team members will most likely have a marketing background and may go to another marketing firm after they work for you. This is what is termed the “right to make a living” in many states that oppose NCAs.
- Fitness studio: You will want to make sure that your staff doesn’t solicit clients to become “private clients” of theirs, such as training them in their home versus in your gym for a cheaper rate.
- Start-up: An NCA is essential to protect yourself as a start-up. This is a scenario where an individual could help you begin your business and then essentially create their own and poach your clients.
- Sales professionals: If your sales professionals are selling a product or service that is widely available on the market, then having an non-compete agreement may help squelch unneeded clientele loss when sales employees leave your company. If your product or service is a niche or patented product, then an NCA is typically not required due to the legal guardrails around the product.
If you determine that you need a non-compete agreement (NCA), it should be part of your onboarding process when you hire employees.
States Laws on Non-compete Agreements
Non-compete agreements often prevent employees from retaining work in the same industry as their former companies. This is why many states have taken matters into their own hands by not allowing NCAs, or, if they do, only under specific or very narrow circumstances.
BREAKING NEWS:
On Jan. 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would potentially ban non-compete clauses between employers and employees in all 50 states. This is based on their finding that non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.
Additionally, a group of US Senators has reintroduced a bill, the “Workforce Mobility Act of 2023,” that would largely ban the use of employer non-compete agreements nationwide per federal law.
Click the drop-down menu to view your state’s law. If your state is not listed, it does not have a current NCA law.
Higher professions are exempt, such as doctors, veterinarians, lawyers, etc. Also, even where allowed in Alabama, non-compete clauses can only be agreed to after employment has begun, not at the start.
Alabama Code 8-1-1 limits non-competes to locations where an employer operates a similar business and is only valid for two years.
Non-compete agreements are enforceable. Only TV/radio broadcasters and physicians (in some circumstances) are exempted.
Non-compete agreements, or clauses within contracts, are not enforceable under California law. California employers can still execute a non-disclosure agreement to prevent the disclosure or use of confidential information and trade secrets by employees.
Non-compete agreements are not enforceable unless they accompany the sale of a business, are signed by highly compensable employees making more than $101,250 per year, or non-solicitation agreements signed by workers earning more than $60,750 per year.
HB 6594, titled, “An Act Concerning Noncompete Agreements,” was introduced on Feb. 2, 2023, and is currently pending committee review. The bill would make unenforceable any noncompete entered into, amended, extended, or renewed on or after July 1, 2023, unless the noncompete meets eleven distinct requirements.
A recent judge ruling found that non-compete and non-solicitation provisions, which have a worldwide geographic scope, were geographically overbroad and unenforceable.
The Non-Compete Clarification Amendment Act of 2022 prohibits non-compete agreements for covered employees. No employer may require or request that a covered employee sign an agreement or comply with a workplace policy that includes a non-compete provision.
Mediators are exempted. Otherwise, under Florida law, non-compete agreements between employers and employees are allowed when they comply with the requirements of Florida’s restrictive covenant statutes.
Their law pertains specifically to the technology sector: If you have a technology company, or a company like a social media firm that uses primarily technology, you will most likely need an invention patent or not be able to enforce a noncompete.
Non-compete agreements are generally enforceable in Idaho so long as they pertain to key employees, are reasonable in duration and geographic location, and are no more restrictive than necessary to protect the employer’s legitimate business interests.
The Illinois Freedom to Work Act prevents employers from entering into non-compete agreements with employees who earn $75,000 or less. Employers also cannot require non-solicitation covenants with employees earning $45,000 or less.
Additionally, both non-compete and non-solicitation agreements are illegal unless certain considerations are met.
The Indiana Senate recently passed a bill to ban non-compete agreements for physicians.
Franchisees that do not renew franchise contracts are exempted.
Additionally, HF 93, is a recently proposed bill to ban non-compete agreements for mental health providers.
Non-compete and non-solicitation provisions are only valid if limited to specific parishes, municipalities, or parts thereof, and the covenant does not exceed two years from termination of employment.
An employer may not require or permit an employee earning wages at or below 400% of the federal poverty level to enter into a noncompete agreement. Additionally, broadcast industry professionals are usually exempted.
Non-compete agreements are prohibited for employees who earn equal to or less than $15 per hour or $31,200 annually.
One unique aspect of Massachusetts’ new non-compete law is its requirement that non-compete agreements include a “garden leave” clause or other mutually-agreed consideration.
In Massachusetts, however, if an employee is terminated without cause or laid off, the non-compete is no longer enforceable.
A non-compete agreement is enforceable so long as it is reasonable – if it is no more restrictive than is necessary to protect the legitimate interests of the employer.
Administrative Assistants or some personal assistants and clerks have limited exemptions.
The Montana Supreme Court ruled that an employee’s non-compete contract cannot be enforced in the state. Montana courts also do not generally uphold non-solicitation clauses.
Montana employers can still execute a non-disclosure agreement to prevent the disclosure or use of confidential information and trade secrets by employees.
Currently in the legislature is a bill (AB 3715/SB 1410) that would prohibit an employer’s ability to require post-employment restrictive covenants with its employees. The bill would not only apply to non-compete agreements, but also to non-solicitation regarding customers/clients and employees as well as confidentiality/non-disclosure provisions.
The Nevada Unfair Trade Practices Act prohibits employers from asking employees paid solely on an hourly wage to sign a non-compete agreement.
Under North Dakota law, non-compete agreements for employees are void and unenforceable.
Non-compete agreements or clauses within contracts are not allowed. Note that Oklahoma law permits the use of non-solicitation agreements with employees or independent contractors but does not permit prohibitions on the hiring or employment of such individuals by former employees or independent contractors.
Still, Oklahoma employers can still execute a non-disclosure agreement to prevent the disclosure or use of confidential information and trade secrets by employees.
Under Oregon Law, a non-compete agreement between an employer and employee is void and unenforceable unless the employer informs the employee in a written offer received at least two weeks before the first day of employment, the non-compete agreement is entered into upon a subsequent bona fide advancement of the employee by the employer, or the total amount of the employee’s annual gross salary and commissions at the time of termination exceeds $100,533.
Non-compete agreements are generally enforceable; except for non-exempt employees, students, interns, and low-income workers.
Under South Dakota law a non-compete cannot exceed two years from the date of termination.
Non-compete agreements are disfavored because they are considered a hindrance to people making a living and supporting themselves and their families. Additionally, if a non-compete agreement is deemed enforceable, then the restrictions must be reasonable regarding time and territorial limits, and those restrictions must be no greater than is necessary to protect the business interest of the employer.
Physicians (in some circumstances) are exempted. While Texas courts generally do not enforce non compete agreements, they will enforce one if it is executed with reasonable geographic, temporal, and activity restrictions.
Vermont’s House of Representatives has proposed a legislation which would ban all non-competes other than in two distinct areas—the sale of a business, or the dissolution of a partnership.
In Virginia, non-compete agreements are enforceable only if they are narrowly drawn to protect the employer’s legitimate business interests, and are not overly restrictive on the employee’s ability to make a living.
If an employee or independent contractor has earnings less than the threshold specified under law, the non-compete agreement is considered void and unenforceable.
Pros & Cons of Non-compete Agreements
| PROS | CONS |
|---|---|
| Secures and protects trade secrets and employee’s knowledge of them | May scare off best-in-class professionals who do not want to be bound to an NCA |
| Ensures that clientele or customers remain with your company | Many states do not enforce or hold up NCA contracts and, in general, NCAs at times bring on legal fights that can be costly and time-consuming |
| May assist in reducing key employee turnover | Professionals may have a difficult time seeking gainful employment within the same field or profession due to NCA limitations |
| Solidifies return-on-investment (ROI) relating to on-going training and investment in personnel (sales professionals, etc.) | Many companies fail to update and keep fully current NCAs as businesses, products, and services evolve over time |
Common Errors to Avoid When Crafting a Non-compete Agreement
Well-written non-compete agreements can help a business retain essential assets and valuable employees, protect its customers, and reduce the threat of unfair competition. If not crafted well, however, they can give you a false sense of security, arguably worse than not having an NCA.
Here’s what to consider.
Too large of a reach when defining your competition will render your NCA useless. Instead, be specific and clarify the definition of what would be construed as competition. Think about if working for a competitor, opening a similar business, or working for a client in your current book of business is considered competing (and why).
For an NCA to be enforceable, there must be consideration, which is a legal expression for an “exchange of value.” When creating your non-compete agreement, expressly explain what the employee stands to gain outside of continued employment.
Non-compete agreements typically do not last forever. Clarify within your agreement when the non-compete clause begins and ends and the exact duration of its validity. Most agreements span one year, depending on their specifics.
Your area of territory may not be worldwide. If your NCA attempts to restrict competition in an unreasonably large territory, it will run into problems. Be sure to describe the restricted area in which the employee cannot compete. What does your territory consist of? Usually, a small radius (within a certain number of miles of the business) is plenty; however, your situation might require more (i.e., a global or online company).
An non-compete agreement that is enforceable in one state may not be enforceable in another. Likewise, a remedy for a violation of the agreement may be legal in one jurisdiction but forbidden in another (within the same state). This raises significant issues for companies engaged in business in multiple states. Determine what state or jurisdiction the NCA will be active and adjudicated in, if needed.
The circumstances of your business and laws governing NCAs will likely evolve over time (including essential employees, key customers, and confidential information or trade data). Clarify any updates and changes with your employees so your NCA evolves, and legality remains strong.
Bottom Line
A non-compete agreement can be helpful, especially, depending on your industry and location, at the management level and professional and sales areas of your business. View laws in your state and seek the advice of an attorney to determine if an NCA makes sense for your business needs. Be sure to have a detailed agreement in place for each essential employee, where applicable.
