How to Negotiate a Fair Non-Compete Clause

Employers often seek to protect their competitive advantages in many industries by including non-compete clauses in employment contracts. These clauses are designed to restrict employees from engaging in activities that could compete with the employer’s business for a specified period after the employment ends. While non-compete agreements are often considered necessary for protecting trade secrets, client lists, and other sensitive information, they can also significantly limit an employee’s ability to pursue new opportunities. As such, negotiating a fair non-compete clause is crucial for both parties to ensure a balance between protecting business interests and safeguarding an individual’s career.

This blog will help you understand how non-compete agreements work, your rights, and strategies on how to negotiate a fair non-compete clause.

What is a Non-Compete Clause?

A non-compete clause, sometimes referred to as a covenant not to compete, is a provision in an employment contract where an employee agrees not to work for or start a competing business within a specified geographical area and time period after leaving their job. Employers often use these agreements to prevent former employees from taking sensitive information, such as customer lists, pricing models, or proprietary business processes, to a competitor or starting their own rival business.

While these clauses can protect legitimate business interests, they may also impose unfair limitations on an employee’s ability to find new employment. For this reason, negotiating a fair non-compete clause is crucial for maintaining a healthy balance between protecting a business and ensuring an employee’s future employment prospects.

Know Your Rights: Legal Framework Around Non-Compete Clauses

The enforceability of non-compete agreements varies significantly across jurisdictions. State laws play a pivotal role in determining whether a non-compete clause can be enforced, and some states impose more restrictions than others. For instance, California has a near-total ban on non-compete agreements, deeming them unlawful as they restrict an individual’s right to earn a living. In contrast, states like Florida and Texas allow non-compete clauses but impose restrictions on their scope and duration to ensure they are reasonable.

When courts evaluate the enforceability of a non-compete agreement, they typically apply a “reasonableness test.” This test focuses on the following key elements:

• Duration: How long does the non-compete restriction last?
• Geographic Scope: What geographic area does the clause cover?
• Scope of Activities: What specific activities or industries does the non-compete restrict?

Courts aim to ensure that non-competes are broad enough in these areas and only protect legitimate business interests without unnecessarily restricting the employee’s ability to find work. Additionally, some states impose public policy considerations, refusing to enforce non-compete clauses if they are found to be detrimental to competition or limit employment opportunities for too many people.

Moreover, recent legal trends are shifting toward limiting the enforceability of non-competes, with the Federal Trade Commission (FTC) exploring nationwide restrictions. In 2023, the FTC proposed a new rule banning most non-compete clauses, emphasizing that these agreements stifle innovation and limit workers’ freedom to change jobs. While this rule is subject to further regulatory reviews and legal challenges, it reflects a broader movement toward reducing the use of non-compete agreements.

Critical Components of a Non-Compete Clause

When negotiating or reviewing a non-compete clause, it is essential to understand the core elements that make up the agreement. The three most critical components of any non-compete are:

• Duration: The length of the non-compete is a significant factor in its fairness. A typical non-compete lasts between six months and two years, with one year being the most common period. Courts often view overly lengthy non-competes as unfair, especially if the employee’s role did not involve access to highly sensitive information.
• Geographic Scope: Non-compete clauses should only restrict employees from working in areas where the employer does business. For instance, if the employer operates only in a specific city, a non-compete restricting employment across the entire state or country is likely unreasonable.
• Industry or Activity Restrictions: The clause should be specific to the activities or industries that could directly compete with the employer’s business. Overly broad non-compete restrictions that prevent the employee from working in an unrelated industry may not hold up in court.

By focusing on these elements during negotiations, employees can push for more reasonable terms that do not excessively hinder their future job prospects.

Strategies for Negotiating a Fair Non-Compete

Negotiating a fair non-compete clause requires understanding the elements mentioned above and using them to reach terms that are both reasonable and protective of the employer’s interests. Non-compete clauses in employment contracts are common, and here are several strategies to help guide the negotiation process:

1. Negotiate the Time Frame: If the non-compete clause includes a long duration, such as two years, consider negotiating for a shorter time period. Courts tend to favor non-competes that last one year or less, particularly if the employee could not access highly sensitive business information.
2. Narrow the Geographic Scope: Ensure the non-compete clause limits competition within a reasonable geographic area. For example, if your employer only operates in a few cities, a non-compete restricting you from working across the entire state or country may be considered excessive. Be sure to negotiate the boundaries only to cover relevant areas.
3. Limit Industry Restrictions: Make sure the clause applies only to the specific activities or industries that are direct competitors to your employer. Broad non-compete restrictions that prevent you from working in unrelated fields may be deemed unenforceable and should be negotiated.
4. Offer Alternatives: If the employer insists on a non-compete, suggest alternatives that protect their business interests without limiting your future opportunities. For example, you could propose a non-solicitation agreement, which prevents you from poaching clients or employees but does not stop you from working in the same industry.
5. Seek Compensation: If the non-compete is unavoidable, negotiate for compensation during the restricted period. This could include severance pay, continued benefits, or a lump sum payment to help you financially while you cannot work in a competing role.

When to Consult an Attorney

Given the complexities of non-compete clauses in employment contracts and the variation in state laws, consulting with a legal professional is essential. An experienced employment attorney can help ensure the non-compete clause is fair and enforceable. They can also offer valuable advice on state-specific non-compete restrictions and recent legal developments that could impact the agreement.

An attorney can:

• Review the Agreement: Identify any overly restrictive or unenforceable terms.
• Negotiate More Favorable Terms: Help you negotiate better terms based on your circumstances.
• Ensure Compliance with State Law: Ensure the agreement complies with applicable state laws, which may impose limits on non-competes.

Common Pitfalls to Avoid

While negotiating or signing a non-compete, avoid these common pitfalls:

• Vague or Overbroad Language: Ensure the agreement is clear and specific. Vague language restricting broad activities can lead to disputes or render the clause unenforceable.
• Excessive Geographic and Time Restrictions: Be wary of clauses imposing overly broad geographical limitations or excessively long time periods, as they are often unenforceable in court.
• Lack of Reciprocity: Non-compete clauses should include fair terms for both parties. If you are asked to adhere to significant restrictions, the employer should offer compensation or benefits in return.

Conclusion: Striking a Balance

A fair non-compete clause balances the employer’s legitimate business interests with the employee’s right to pursue future employment. How to negotiate a fair non-compete clause involves setting reasonable timeframes, geographic limitations, and industry restrictions to help ensure that both parties are protected. Employees should always seek legal advice when negotiating these agreements, as an attorney can help navigate the complexities and ensure that the clause is enforceable under state law.

Both employers and employees benefit from a well-drafted non-compete that clearly defines expectations, protects business interests, and allows employees to pursue new career opportunities after their employment ends. If you need assistance negotiating or reviewing a non-compete agreement, contact Cantrell Schuette to speak with one of our experienced attorneys, 

Works Cited

1. Cornell Law School. “Noncompetition Agreement.” Legal Information Institute, Cornell Law School. Accessed October 10, 2024. https://www.law.cornell.edu/wex/noncompetition_agreement
2. Workplace Fairness. “Non-Compete Agreements: What Employees Should Know.” Accessed October 10, 2024. https://www.workplacefairness.org/non-compete-agreements/
3. Investopedia. “Non-Compete Agreement Definition.” Accessed October 10, 2024. https://www.investopedia.com/terms/n/noncompete-agreement.asp
4. Wiley Rein LLP. “Non-Compete Clauses in Government Contracting: A Case Study in Enforceability.” Accessed October 10, 2024. https://www.wiley.law/newsletter-Non-Compete-Clauses-in-Government-Contracting-A-Case-Study-in-Enforceability
5. Seyfarth Shaw LLP. “FTC Non-Compete Ban: What You Need to Know.” Accessed October 10, 2024. https://www.seyfarth.com/news-insights/ftc-non-compete-ban-what-you-need-to-know.html