How To Know if a Non-Compete Agreement Is Reasonable
Last Updated: October 17, 2023
Written by
Zack Dean
Zack Dean, BComm
Zack Dean is a former Marketing Writer for LawDepot. Zack earned his Bachelor of Communication from Grant MacEwan University in Alberta. With over four years of experience in producing digital content, Zack strives to transform complicated legalese into easily understandable content. Zack is passionate about crafting content with a familiar voice that helps users easily get through difficult concepts. After LawDepot, Zack continued his passion for crafting content that helps people and is currently a Communications and Marketing Specialist at The Salvation Army.
|
Fact checked by
Rebecca Koehn
Rebecca Koehn, BSc, MFA
Rebecca Koehn has been working in content creation and editing for over ten years and search engine optimization for over five years. Koehn is the Content Marketing Manager for LawDepot. After receiving her Bachelor of Science in Biological Sciences from the University of Alberta, Koehn decided to follow her love of writing and gained her Master of Fine Arts in Creative Writing and Publishing from Kingston University in London, England. Koehn is avid in digital journalism. She has produced content for LawDepot, Techopedia.com, Yogapedia.com, and has had her creative writing published in multiple digital anthologies. Koehn uses her background in sciences and arts to create high-quality content that sparks readers' interest and holds their attention from start to finish.
Key Takeaways:
- A Non-Compete Agreement restricts an employee from entering into competition with an employer after their employment period ends.
- Some Non-Compete Agreements can be unreasonable and limit your future job prospects.
- If an agreement is unreasonable, due to something like an unspecific time period, it may be unenforceable.
Starting a new job is an exciting moment in a person’s life. For some, it’s a fresh start. For others, it represents years of hard work finally paying off.
That’s why it can almost feel inappropriate to think about your next job opportunity before the first day of your new one, but it’s something you may need to do when your new boss hands you a Non-Compete Agreement to sign.
A Non-Compete Agreement is usually part of an Employment Contract for new hires. A Non-Compete Agreement helps protect a company’s intellectual property; it keeps employees from taking company information and secrets with them to a competitor or using them to start their own business. According to a 2019 study by the Economic Policy Institute, approximately 50% of U.S. employers require employees to sign a Non-Compete Agreement.
While this sounds reasonable in theory, some employers use the agreement as a way to handcuff you and limit your future job prospects. The strategy simultaneously discourages you from leaving the company and hurts its competitors' talent pool when recruiting.
In July 2021, President Biden’s Administration released an Executive Order that called upon the Department of Justice (DOJ) and the Federal Trade Commision (FTC) to “ curtail the use of unfair non-compete clauses and other clauses or agreements that may unfairly limit worker mobility” (Section 5g) in order to promote fair market competition and reduce industry monopolization. Furthermore, some states, such as California, North Dakota and Oklahoma completely ban non-compete agreements. Whereas other states, like Oregon (Senate Bill 169) and Nevada (Assembly Bill 47 § 22.5(7)), have even passed laws that severely limit the enforceability of non-compete agreements.
That's why it's important to know the features of a fair Non-Compete Agreement in your state before you sign on the dotted line. You wouldn't want to eventually end up in court so that you can continue working in the state you currently live in.
Does it pass the “reasonable person” test?
Luckily, there are limitations to an enforceable Non-Compete Agreement, so you aren't at the mercy of your new employer forever. The agreement can't be unreasonable, vague, or ambiguous about activities. In other words, it needs to outline any restrictions to your future employment opportunities specifically, and it can't be so broad that you can't find a new job.
One way of determining whether a Non-Compete Agreement will hold up in court is to apply the ' reasonable person' test. This is a generic law term that sets a hypothetical standard for deciding if an average person would decide that something is fair or unfair.
As long as the agreement contains terms that are considered to be fair given the circumstances, then it has a better chance of being enforceable.
Does it have an unspecific time period?
Unfair time restrictions are one way employers can hurt your ability to find a new job within your current industry.
A Non-Compete Agreement typically lasts six months to two years, but varies depending on your state’s laws. A judge is likely to find anything longer than that to be unreasonable, and an indefinite agreement is out of the question.
For instance, a telecom company might say that if their marketing director leaves, they can't work for a competing telecom company for a period of six months. This restriction is due to the fact that the former marketing director can use their insider knowledge of their previous employer's upcoming sales or promotions to influence the sales or promotions of the new company they are working for.
However, it’s unreasonable to expect the marketing director to never work for a competitor at any time in the future, so not stating the specific period of time that a non-compete is in effect would most likely make the agreement unenforceable.
Does it have unreasonable geographic restrictions?
Another strategy employers use to limit your career options is to place geographical restrictions in your Non-Compete Agreement. These restrictions mean you can't compete with your previous employer or solicit clients that were doing business with that employer within a specific area.
Although this is a common feature of non-competes, there are limits to how wide an area they can prohibit you from working in.
The geographical limitations are sometimes defined by the radius surrounding a company's headquarters (e.g., you can't work for a company located within five miles of your previous employer).
Other limitations might prohibit you from working in specific cities or states the company does business in. What's considered a reasonable limitation depends on the industry and services provided.
For example, let's say that you're the owner of a local coffee shop and decide to sell your business. While in business, you built a significant customer base over the years, getting to know many of your customers personally.
In the sale negotiations, the buyer is entitled to add a clause to the Purchase of Business Agreement that specifies you can't open a new coffee shop in the same area. This is to prevent you from poaching loyal customers from your former business. The geographic restriction, however, has to make sense. It wouldn't be reasonable to prevent you from opening a coffee shop in an area where the buyer wouldn't be conducting business (like the other side of town).
Does it create a monopoly?
There are also factors in the creation of a Non-Compete Agreement that might go beyond what’s directly best for you but still work in your favor.
Free and fair competition is part of the American dream. This means a company can’t use a Non-Compete Agreement to eliminate all potential competition and form a monopoly in a specific area.
For example, suppose a young electrician works for the only electrical company in a small town for five years and feels ready to use their general industry knowledge to start their own business. The electrician's current employer can’t use a Non-Compete Agreement to ensure their electrical company remains the only one in town. Another electrical company is good for the local economy because it creates jobs and gives customers more service providers to choose from.
However, the employer could justifiably use a Non-Compete Agreement to prevent the young electrician from using their customer list or hiring the employer's other employees for a specified period of time.
Do the circumstances warrant a Non-Compete Agreement?
Whether you require a Non-Compete Agreement depends on your circumstances and your state’s laws. You aren’t legally required to sign a Non-Compete Agreement just for the sake of it.
The agreement needs to actually be necessary for it to be enforceable. This means you should be in a position with the company to obtain confidential information or trade secrets. If you aren't in a place to do so, you also aren't in a position to leak sensitive information to another company. In this case, the Non-Compete Agreement restricts your future work prospects for no reason.
Sometimes the validity of the agreement is based on the circumstances you left the company under. For example, if you have access to sensitive information and leave the company of your own free will, the Non-Compete is enforceable (to the extent that the restrictions are reasonable). If you're let go by the company, the restrictions placed on you by the agreement may be limited.
Before you sign a Non-Compete Agreement, ask yourself where you see yourself in a few years and how the document will affect that vision. If the time and geographical restrictions are too broad, or you’re simply not in a position to gather sensitive company information, speaking up in the moment and making adjustments to the agreement may save you a headache and legal fees down the road.
Non-Compete Agreements: Enforceability by state
Each state has different legislation in regards to the enforceability of Non-Compete Agreements. The table below highlights which states do not allow Non-Compete Agreements, which have exemptions for different industries or professions, and which generally allow Non-Compete Agreements.
| State | Legislation |
| Alabama | Non-Compete Agreements with restrictions up to 18 months are generally enforceable ( Ala. Code § 8-1-190 ). |
| Alaska | Non-Compete Agreements are valid as long as they’re reasonable in time, space and scope . |
| Arizona | Not permitted for broadcasters ( Revised Statutes Title 23. Labor § 23-494 ). |
| Arkansas | Not permitted for medical professionals, such as doctors, chiropractors, dentists, and any other profession listed in Arkansas Code Title 17, Subtitle 3 {AR Code § 4-75-101 (j)(2)} . |
| California | Non-Compete Agreements are void and unenforceable ( Code §§ 16600- 16602.5 ). (However, that doesn't mean such contracts don’t exist in the state and can still have an inhibiting effect on those unaware of the law.) |
| Colorado | Non-Compete Agreements are generally not enforceable unless they’re used to protect trade secrets or a purchaser of a business, recover education or training expenses from an employee of less than two-years, or restrict executive and management personnel or professional staff to those personnel ( C.R.S. Section 8-2-113 ). |
| Connecticut | Connecticut has no statute law which regulates non-compete agreements universally. Courts apply the usual reasonableness tests. Some professions are dealt with individually by statute. For example, Non-Compete Agreements are only permitted for security guards if the employer can prove the Security Guard employee obtained trade secrets ( Connecticut General Statutes Title 31. Labor § 31-50a ). |
| Delaware | Not permitted for physicians ( Delaware Code Title 6. Commerce and Trade § 2707 ). |
| District of Columbia | The Ban on Non-Compete Agreements Amendment Act of 2020 generally prohibits Non-Compete Agreements. However, employers are allowed to use Non-Competes to protect sensitive information, and a buyer of a business can ask the seller to sign one as well. |
| Florida | Florida permits valid restraint of trade where the restrictive covenant (non-compete agreement) is supported by a legitimate business interest ( Fla. Stat. Ann. §§ 542.335 ). |
| Georgia | Non-Compete Agreements are enforceable as long as they’re reasonable in time, space, and scope ( Ga. Const., Art.III, Sec. VI, Par. V(c), as amended; OCGA §§ 13-8-50-59 ). |
| Hawaii | Non-Compete Agreements can protect trade secrets and confidential information as long as it’s reasonable in time, space, and scope ( Haw. Rev. Stat. § 480-4 ). |
| Idaho | Non-Compete Agreements are limited to an 18-month duration and can only be applied to “key employees” who are in the highest-paid 5% of employees in a company ( Idaho Code §§ 44-2701-2704 ). |
| Illinois | The legitimate business interests of the employer are protected but Non-Compete Agreements entered into with low-wage employees are void ( 820 I.L.C.S. §§ 90/1 et seq. ). |
| Indiana | Indiana has no statute law which regulates non-compete agreements universally. Courts apply the usual reasonableness tests. Some professions are dealt with individually by statute. For example Non-Compete Agreements aren’t enforceable on physicians unless they meet all the requirements listed on page 13 of HB 1004 . |
| Iowa | Indiana has no statute law which regulates Non-Compete Agreements universally. Courts apply the usual reasonableness tests. Some professions are dealt with individually by statute. For example Not permitted for franchisees when the franchisor chooses to not renew the franchise . |
| Kansas | Kansas doesn’t have a general statute regulating Non-Compete Agreements. Courts will apply a reasonableness standard and construe agreements against the employer. Industry specific regulation applies to the legal sector so covenants can’t restrict a lawyer’s entitlement to practice law . |
| Kentucky | Non-Compete Agreements are enforceable as long as they’re reasonable in time, space and scope . |
| Louisiana | Non-Compete Agreements can’t be longer than two years and aren’t permitted for automobile salespeople or real estate brokers’ licensees ( La. Rev. Stat. Ann. § 23:921 ). |
| Maine | Not permitted low-wage workers who earn less than or equal to 400% of the federal individual poverty line ( Me. Rev. Stat. Ti. 26, c. 7, § 599-A ). |
| Maryland | Non-Compete clauses applied to employees who earn less than $15 per hour or $31,200 annually are null and void ( Md. Code, Lab. & Empl. § 3-716 ). |
| Massachusetts | Statute law provides that non-compete agreements must meet listed requirements to be valid and enforceable( Mass. Gen. Laws c. 149, § 24L ). |
| Michigan | Non-Compete Agreements are enforceable as long as they’re reasonable in time, space, and scope ( Mich. Comp. Laws § 445.774a ). |
| Minnesota | Non-Compete Agreements are enforceable as long as they’re reasonable in time, space, and scope . |
| Mississippi | Non-Compete Agreements are enforceable if they’re reasonable in time, space, and scope . |
| Missouri | Secretaries and clerks have limited exemption ( 28 Mo. Stat. Ann. § 431.202 ). |
| Montana | Non-Compete Agreements are enforceable as long as they’re reasonable in time, space, and scope ( Mont. Code Ann. §§ 28-2-703-05 ). |
| Nebraska | No general statute governing non-competes. Courts apply the usual reasonableness standard. Industry specific prohibition for drivers working for a transportation network company ( Nebraska Revised Statute 75-330 ). |
| Nevada | Statute law makes non competition covenants void and unenforceable unless supported by valuable consideration, may not impose undue hardship on the employee, restraint must be in proportion to need for protection ( Nev. Rev. Stat. § 613.195 ). |
| New Hampshire | Not permitted for physicians ( RSA 329:31-a ) or low-wage employees who earn less than or equal to two times the minimum applicable wage ( RSA 275:70, 275:70-a ). |
| New Jersey | Case law provides that restrictive covenants are unenforceable against psychologists and lawyers . |
| New Mexico | Non-compete provisions restricting healthcare practitioners are enforceable only for the duration of the employment with the party relying on the restriction ( NM Stat § 24-1I-2 ). |
| New York | Non-Compete Agreements are valid as long as they’re reasonable in time, space, and scope . |
| North Carolina | Any contract that limits a person’s right to do business is only valid if the person being limited agrees in writing ( N.C. Gen. Stat. § 75-4 ). |
| North Dakota | Non-Compete Agreements are void and unenforceable with exceptions for restrictions associated with the sale of the goodwill of a business and dissolution of partnerships and corporations ( N.D. Cent. Code § 9-08-06 ). |
| Ohio | Non-Compete Agreements are enforceable as long as they’re reasonable in time, space, and scope . |
| Oklahoma | Non-Compete Agreements are void and unenforceable though solicitation of goods and services from established customers of the former employer may be restrained( OK Stat. § 15- 219A ). |
| Oregon | Non-compete agreements are voidable unless conditions set out in the statute are met:( Or. Rev. Stat. § 653.295 ). |
| Pennsylvania | For a Non-Compete Agreement to be enforceable, the employer must be protecting a legitimate business interest and the employee needs to receive something in return from the employer (e.g., a higher salary). |
| Rhode Island | Not permitted for physicians, student interns, and employees under 18 years old ( R.I. Gen. Laws §§ 28-59-1–3 ). |
| South Carolina | Non-Compete Agreements are enforceable as long as they’re reasonable in time, space, and scope . |
| South Dakota | Non-Compete Agreements can’t exceed two years in duration, special provision for health care providers, captive insurance agents, sales of goodwill and dissolution of partnerships ( S.D. Codified Laws § 53-9-8, et seq .). |
| Tennessee | Non-Compete Agreements for health care providers (who don’t specialize in the practice of emergency medicine) are limited to two years or less in duration with a geographical restriction of no more than a 10-mile radius from the employee’s primary practice site ( TN Code § 63-1-148 ). |
| Texas | Not permitted for physicians in certain circumstances ( Tex. Bus. & Com. Code §§ 15.50-.52 ). |
| Utah | Non-Compete Agreements can be no longer than one year after the employee has left the company. Non-competes are only valid for broadcasters under the specific circumstances listed in Utah Code Ann. §§ 34-51-101- 301 . |
| Vermont | Not permitted for beauticians and cosmetologists ( Vermont Statutes Title 26. Professions and Occupations, § 273. Exemptions ). |
| Virginia | Covenants not to compete are prohibited for low-wage employees ( Virginia Code Title 40.1. Labor and Employment § 40.1-28.7:8 ). |
| Washington | Void and unenforceable for employees who earn less than or equal to $100,000 per year, presumption that restrictions exceeding 18 months duration are unenforceable ( RCW §§ 49.62.020 ). |
| West Virginia | Non-Compete Agreements for physicians are limited to one year in duration and a 30-mile radius around the primary practice location. The agreement is void and unenforceable if the physician is terminated by the employer ( W. Va. Code §§ 47-11E-1 to 47-11E-5 ). |
| Wisconsin | Non-Compete Agreements are enforceable as long as they’re reasonable in time, space, and scope ( Wis. Stat. Ann.§ 103.465 ). |
| Wyoming | Non-Compete Agreements are enforceable as long as they’re reasonable in time, space, and scope . |
Related Articles
