What Is a Non-Compete Agreement? Definition and Guide

A non-compete agreement is a contract between two parties, usually two individuals or one company and one individual, in which one of the individuals promises not to compete with the other individual or company once their relationship with the company has ended. That is, he or she will not start, join, or buy a business that is similar to, and in competition with, the other.

A non-compete agreement is a contract between two parties, usually two individuals or one company and one individual, in which one of the individuals promises not to compete with the other individual or company once their relationship with the company has ended. That is, they will not start, join, or buy a business that is similar to, and in competition with, the other.

The agreement is typically signed at the start of a business relationship, such as between a company and:

• A new employee
• An independent contractor
• A consultant hired to address a particular internal issue
• A vendor that will be privy to confidential information

But it can also be signed as a relationship is ending, too, such as when:

• A key employee is being let go or chooses to leave
• A partner decides to exit the business, or is forced out

The goal of the agreement is to make it clear that if an employee leaves the company, or an external consultant finishes his or her engagement, they are prohibited from creating a new business to compete with the company that just paid them for their services.

Key clauses

While the overarching goal of such an agreement is to discourage or prevent a new competitor from forming, there are specific aspects to the agreement that need to be spelled out, including, but not limited to:

• Who is agreeing not to compete
• Who is preventing the competition
• As of when is the agreement effective
• How long is the agreement enforceable
• What type of business is prohibited
• The reason for the prohibition
• The geographic area within which competition is prohibited
• What the payment is – called “consideration’ – in return for this agreement

There may also be other clauses included, especially when employees are concerned, that spell out:

• Non-solicitation – meaning clients of the firm may not be contacted and persuaded to leave
• Non-recruitment – nor can employees be approached about jumping ship for the new company

Are they enforceable?

There has been much discussion about whether non-compete agreements will hold up in a court of law. In some states, such as California, non-compete agreements are unenforceable against employees. So, as a business owner, you can ask an employee to sign one, but it won’t mean much there.

In other states, non-competes may be enforced, and it often comes down to how reasonable the contract was. In particular, how restrictive is the scope, geography, and time. The more broad the agreement, such as asking for a global non-compete in any kind of management consulting lasting ten years, the less likely the courts will uphold it, or enforce it.

It’s always wise for anyone creating or signing a non-compete agreement to first consult an attorney for advice about it.

Non-Compete Agreement FAQ

What is the purpose of a non-compete agreement?

A non-compete agreement is a contract between an employer and an employee that is designed to protect an employer's business interests by preventing an employee from competing with the employer after their employment ends. This agreement helps protect a company's trade secrets, confidential information, and other proprietary assets from being exploited by the former employee.

Does a non-compete mean I can't work for a competitor?

Yes, a non-compete typically means that you cannot work for a competitor. Depending on the specifics of the agreement, it may also mean that you cannot start your own business that competes with your former employer, solicit customers of your former employer, or partner with a competitor.

Are non-competes actually enforceable?

Non-competes can be enforceable in certain circumstances, depending on the state. Generally, an employer can only enforce a non-compete if it is reasonable in scope and duration, is related to a legitimate business interest (such as protecting business secrets or client relationships), and does not impose an undue hardship on the employee. It is important to note that some states (such as California) do not enforce non-compete agreements at all.