In recent years, non-compete clauses have ignited controversy over the ethical implications of restricting an employee's future work opportunities. But they do hold value for employers.
But, should your company use them?
This article will explain non-compete clauses, explore the components of a non-compete agreement, and examine the various legal frameworks governing their use across different countries.
A non-compete clause is a contractual provision in employment contracts that restricts an employee from working for competitors or starting a competing business for a defined period after leaving an employer.
The purpose of a non-compete clause is to:
Non-compete clauses are often used in highly competitive industries where employees have access to sensitive information or trade secrets. However, they aren’t universally legal.
When writing a new employee’s contract, it’s important to ask: are non-compete clauses enforceable in the area the individual works in? This can vary by country, or by state in the United States .
Some US states ban or limit non-compete clauses due to concerns about worker mobility and fair competition in the labor market.
Therefore, it’s important to know the states that restrict and the states that still enforce non-compete agreements.
States where non-compete clauses are banned:
New York has also passed legislation that will ban non-compete clauses to protect low-wage workers. However, this law has yet to be finalized.
States where non-compete clauses are restricted:
While many states still allow non-compete clauses to be enforced, it’s important to note there’s a growing resistance against them, and as a result, the number of states banning or restricting non-compete clauses has risen.
Non-compete clauses are controversial because they protect business interests but may also limit employee job mobility and career opportunities.
On the one hand, employers argue that non-compete clauses are necessary to protect their trade secrets and to prevent employees from joining competitors.
They also argue non-compete clauses can attract and reassure investors and protect their investment in human capital. Some studies indicate the “value of human capital” comes from their “ tacit knowledge ” of workplaces and that if employees can freely move from one competitor to another, it can hurt businesses' confidentiality. However, from an employee’s point of view, non-compete clauses can be seen as unfair, particularly if they’re loosely defined and prevent employees from working for any business in the industry.
Non-competes can make it difficult for employees to find new work opportunities, particularly if their skills are specific to one industry. Joe Biden remarked on February 2023 that “...30 million workers had to sign non-compete agreements when they took a job” and that these agreements stopped employees from taking jobs that offered higher pay rates and better opportunities, ultimately hurting them in the long run.
Additionally, it’s important to note the impact non-compete clauses have on the global economy and job market.
Some economists argue that non-competes can harm economic growth by stifling wage rates and employee mobility, while others believe they’re beneficial as they reduce labor turnover.
Some positives of non-compete clauses include:
Some negatives of non-compete clauses include:
At its core, the ethics surrounding non-compete clauses are complex as they aim to protect business at the expense of limiting employees’ career opportunities. While it’s important to keep your company’s intellectual property safe from competitors and unauthorized access, it’s equally critical to remember the moral responsibility you have to your employees.
As such, both prospective employers and prospective employees should carefully consider the implications of a non-compete clause before signing it. Also, policymakers need to assess the ethical implications of their use.
In 2024, the FTC finalized a rule to ban most non-compete agreements in the US, but its enforcement is currently uncertain due to legal challenges.
In April 2024, the US Federal Trade Commission (FTC) announced a final rule that would ban most non-compete agreements nationwide. The rule is intended to increase worker mobility, promote competition, and limit restrictions on employees changing jobs.
Under the rule, employers would generally be prohibited from entering into or enforcing non-compete clauses with workers.
The FTC has argued that non-compete agreements suppress wages, reduce innovation, and limit job opportunities. As a result, the ban is designed to make it easier for workers to move between employers and for businesses to compete for talent.
However, the rule is currently facing legal challenges in US courts, and its implementation is not yet guaranteed. Some courts have already paused enforcement while these challenges are reviewed.
Because of this uncertainty, businesses should not assume non-compete clauses are fully banned nationwide. Instead, employers should:
Given the rapidly evolving legal landscape, it’s important to seek legal guidance and ensure your employment agreements remain compliant with current regulations.
Non-compete clauses are typically used at the pre-employment stage of employment and need to be signed by the prospective employee before starting work with a company.
The clauses themselves are contained in the employment contract.
Non-compete provisions typically outline the scope and duration of the restrictions, as well as the specific activities the employee is prohibited from engaging in. However, they can be tailored to specific businesses and industries.
Non-compete clauses generally include:
Non-compete clauses can be complex, and there are many factors to consider when drafting one for your future employee. Therefore, it’s important to speak with an HR professional and experienced lawyer to get personalized advice on your specific situation.
There are several parts of a non-compete clause employers must carefully consider to ensure it’s legally sound and fair to both parties.
If an employer makes a non-compete clause too restrictive, it can be seen as a violation of an employee’s rights and may even be considered unenforceable by a court of law.
For example, in 2021, Amazon sued Carl Nelson , a former employee, for violating his non-compete agreement. However, Nelson fought against this claim, stating the agreement was “...unreasonably overboard, unenforceable, and in violation of Washington law.” That case is ongoing.
Here are some common mistakes employers can make:
While non-compete clauses can be a valuable tool for employers, there are many pitfalls you must avoid to ensure you’re legally compliant and fair to your company as well as your employees.
Clauses that are fully legal but still overly restrictive can not only impact an employer’s ability to attract and retain talent , but also impact your reputation with future employees.
The consequences of an employee violating a non-compete agreement vary depending on the country where your employee works and the specific terms of the agreement.
However, in general, an employee can take legal action against an employee who violates a non-compete agreement — such as suing for damages or seeking an injunction to prevent the employee from competing.
The specific legal remedies available to the employer will depend on the jurisdiction and language of the agreement. For example, in Australia, the maximum penalty for a civic breach of the Competition and Consumer Act 2010 is $50,000,000 .
When it comes to drafting and reviewing non-compete agreements, it’s best to seek legal advice from experienced professionals who know what they’re doing.
At Remote, we offer HR consulting services . Our experts can provide guidance on the legal requirements of various jurisdictions and help you ensure that your non-compete clauses are enforceable and fair to both parties.
If you’re considering using a non-compete clause in your employment contracts, it’s important to remember that these clauses look different across the globe.
It’s crucial to keep in mind the different laws and regulations surrounding non-compete clauses in each country and any updates that may impact your compliance.
| Are they legal? | Typical duration of a clause? | |
|---|---|---|
| United States | Varies | 6-24 months |
| United Kingdom | Yes | 3-12 months |
| Australia | Yes | 12-24 months |
| Germany | Yes | 6-24 months |
| Spain | Yes | 6-24 months |
| Singapore | No | N/A |
Non-compete clauses aren’t the only way to protect your business.
In fact, with the controversy surrounding it, as well as the proposed bill trying to stop non-compete clauses in the US, it might be time to look for an alternative approach.
Here are some alternatives:
In addition to these strategies, you can also take steps to build a strong company culture that discourages employees from leaving or competing with you.
This could come from offering competitive salaries and benefits , providing opportunities for advancement, and creating a positive work environment.
Remote can help you draft worker contracts that protect your company without restricting employees. We will base the contract on the country the worker is in and consider cultural factors that influence confidentiality.
Remote helps companies create compliant employment contracts that protect confidential information while aligning with local labor laws.
If you’re wondering about the best way to include non-compete clauses in employment contracts to protect your business without hindering employee mobility, Remote can help.
Our global HR services include employer of record and an HR management software that can help you manage the employee lifecycle from start to finish. Remote’s employment specialists have legal knowledge of local labor laws and can help you draft fully compliant agreements that are customized to your unique needs.
Talk to a Remote expert today and find out how our HR experts can help protect your business!