Learn all about a non-compete agreement, including the laws and regulations in your state. Plus, set up your own non-compete agreement with a free customizable template.
Non-compete Agreement (NCA): What It Is & State Laws [+ Free Template]
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 Hartman 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) is used to safeguard 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 in the process. The agreement, or contract, is also used by a business when it has a unique or well-performing product, service, or sales platform with clientele 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 NCA template and customize it to your specific business needs.
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What to Include in a Non-compete Agreement
To maintain a detailed and legally binding NCA, certain things should be included in your agreement.
- Restricted Business: Clearly define in your agreement the details and activity that relate to your business that you wish to protect.
- Restricted Territory: The NCA 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 the NCA 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 NCA should be listed, to include a percentage of outside business activities that are allowed.
- 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 NCA 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 of your NCA should state any provision or legal remedies incurred as a result of a breach of contract.
- Acknowledgment: The bottom of your NCA should have a section for the signature and date of both the employee and the company representative.
States Laws on Non-compete Agreements
NCAs often prevent employees from retaining work in the same industry as their former companies. This is why many states have chosen to take matters into their own hands by not legally allowing NCAs, or, if they do, it is under specific or very narrow circumstances. Click the drop-down menu to view your state’s law. If your state is not listed, it does not have an NCA law.
When to Use a Non-compete Agreement
In general, having an NCA 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, see the following questions. If you answer “yes” to any of them, you should consider having an NCA 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 an NCA, 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.
- Startup: An NCA is essential to protect yourself as a startup. 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 NCA 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.
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 NCAs 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 provide you with a false sense of security, which is arguably worse than not having an NCA. Here’s what to watch out for:
- Interpretation of Competition: 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).
- Lack of Consideration: For an NCA to be enforceable, there must be consideration, which is a legal expression for an “exchange of value.” When creating your NCA, expressly explain what the employee stands to gain outside of continued employment.
- Length of Enforceability: NCAs 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.
- Definition of Territory: 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 for an NCA; however, your situation might require more (i.e., a global or online company).
- Confirm Jurisdiction: An NCA 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.
- Failure to Update: 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
An NCA can be helpful, especially at the management level and professional and sales areas of your business, depending on your industry and location. 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 NCA in place for each essential employee, where applicable.
