Should You Sign a Noncompete Agreement?

When you start a new job, you will most likely be presented with a stack of papers to sign. Among the acknowledgment forms, benefits paperwork, and tax documents, you might find a noncompete agreement.

A noncompete agreement (also referred to as a covenant not to compete) is a contract in which an employee agrees not to go work for a competitor or start a business that competes with the employer after leaving a job.

New employees often wonder why, on the first day of work, their employer would ask them to sign an agreement that takes effect only after they leave the company.

This article explains what noncompete agreements are, how they work, and how to decide whether to sign one.

What Is a Noncompete Agreement?

A noncompete is a contract between an employee and an employer. In the contract, the employee agrees not to compete with the employer after the employment relationship ends. The agreement should spell out what types of competition are prohibited. Typically, a noncompete agreement bars the employee from going to work for a competitor or from starting his or her own competing business.

Contracts are legal only if each party gets some benefit. The employer clearly benefits from a noncompete because the employee gives up the opportunity to work for or start a competing business, which could potentially eat into the employer's profits. So what does the employee get? Courts have generally found that being hired for the promised job is a sufficient reward to make the contract enforceable.

Legality of Noncompete Agreements

Noncompete agreements are not legal in every state. Oklahoma, for example, refuses to enforce noncompete agreements. California goes one step further: Not only are noncompetes unenforceable in the state, but it's illegal for an employer to even ask employees to sign one.

An employer that asks employees to sign noncompete agreements that can't be enforced may really be trying to trick those employees into thinking that they can't go work for a competitor. This gives the employer an edge over other employers that are obeying the law, which California has deemed a form of unfair competition.

When Are Noncompete Agreements Enforceable?

Even in the majority of states where noncompete agreements are legal, they are only enforceable if they are reasonable. If an agreement is so restrictive that an employee can't make a living, a court might not enforce it.

Factors That Determine Whether Noncompete Agreements Are Enforceable

Generally, courts look at several factors when deciding whether to enforce a noncompete:

• What counts as competition? A contract that prohibits an employee from going to work for a short list of competing companies is more likely to be enforced than one that bars the employee from seeking work at "any manufacturing plant" or "any accounting firm," for example.
• What geographical area does the contract cover? A contract is more likely to be enforced if it is limited to competitors in the immediate area, rather than applying statewide or even nationwide.
• How long does the contract last? A contract that has a relatively short time frame (for example, a year or two) stands a better chance of holding up in court than a contract that lasts for ten years or forever.
• What does the employee know? Courts understand that an employee with intimate knowledge of a company's customer lists, pricing structures, manufacturing processes, intellectual property, or other trade secrets could do real harm by going to work for a competitor. On the other hand, lower level employees who don't have access to this type of information can likely move among competing businesses without doing damage. A company that asks everyone to sign a noncompete, from the CEO to the mail room clerk, is more likely to lose in court than a company that requires noncompete agreements from only a few select employees.

Should You Sign a Noncompete?

Unless you work in a state that prohibits noncompete agreements, your employer can require you to sign one as a condition of employment. In other words, if you want the job, you will have to sign the noncompete agreement.

However, that doesn't mean you should sign whatever is put in front of you. If you're asked to sign a noncompete that seems unreasonable, based on the factors discussed above, you can try to negotiate something less restrictive. And, if you have real concerns about your ability to earn a living after leaving your employer, you might want to show the noncompete agreement to a lawyer and find out whether it will be enforced in your state. A lawyer can also help you try to negotiate a less burdensome agreement.

Can You Be Fired If You Don't Sign a Noncompete Agreement?

In states where noncompete agreements are permitted, an employer can generally refuse to hire or fire an individual who refuses to sign a noncompete agreement, as long as the agreement is reasonable.

In every state except Montana, employees typically work "at will," meaning that an employer can terminate their employment for any reason, as long as it is not discriminatory, retaliatory, or in violation of a contract.