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.
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.
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.
Most states allow noncompete agreements. Even in these states, however, a noncompete agreement is only enforceable if it is reasonable. If an agreement is so restrictive that an employee can't make a living, a court might not enforce it. Generally, courts look at several factors when deciding whether to enforce 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.