Non-Compete Agreements: Trends, Risks, and Alternatives

Non-compete clauses are common, with almost one in five US employees bound by them, but they’re also increasingly controversial and even litigious.

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In this article, we’ll examine how non-competes work, what they’re meant to do, and whether there are better ways to achieve the same ends.

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What are non-compete clauses?

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Non-compete clauses, or non-compete agreements (NCAs), are clauses in employment contracts that restrict a worker from going over to a competitor or starting a business in the same industry, typically for a certain time period in a certain territory. (The purpose of the period clause is to avoid direct competition immediately after the worker’s employment ends.)

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Companies include these clauses in the contracts of both employees and independent contractors to protect intellectual property, reduce worker turnover, and retain their client base.

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US statistics

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In 2024, 30 million Americans (almost one in five workers) were bound by non-compete clauses in employment contracts. According to the Government Office of Accountability, the higher the position, the more likely it is that the employee is required to sign an NCA. For example, 98% of employers oblige executives and managers to sign them.

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Competition clauses are used especially often in IT (19.5% of workers), professional and business services (19.2%), and finance (18.2%).

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How do non-compete contracts work?

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Typical non-compete clauses specify a duration (usually six months to two years), a territory (city, state, or country), and industry restrictions (employees might be prohibited from working in a certain field or position). They may also specify remuneration: workers receive something in exchange for signing the NCA, such as training or money.

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What a non-compete clause looks like

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Below is a fragment of a typical non-compete clause for an independent contractor. 

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SHRM, Bloomberg Law, SignWell, and Contractbook have templates of non-compete clauses for employment contracts.

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What happens if an employee violates an NCA?

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In case of violation (including of an implied non-compete clause), the company can sue, demand monetary compensation for losses, and request an injunction prohibiting the employee from working with competitors. The losing party typically has to pay court costs, including attorney's fees. Plus, having this on one’s record can make it harder to get a job.

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An example is the 2024 DraftKings case. Michael Hermalyn, a former DraftKings executive, went over to the rival gambling company Fanatics despite having signed an NCA. DraftKings sued, claiming Hermalyn had also stolen confidential data and tried to poach employees. The court sided with the company and barred Hermalyn from providing services related to any aspect of his work for DraftKings for 12 months.

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Legality of non-competes in the US

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The Federal Trade Commission (FTC) tried to ban non-compete agreements in April 2024, but courts in Texas and Florida blocked the initiative. As a result, regulating NCAs is up to the states.

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California, Oklahoma, Minnesota, and North Dakota have banned non-competes outright. Another 33 states and Washington, DC have placed restrictions on their use. For example, in Colorado, NCAs are only allowed for employees with incomes above $123,750.

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Some states are taking an industry-specific approach: four states (Pennsylvania, Louisiana, Maryland, and Indiana) have recently restricted or attempted to restrict NCAs in health care.

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Trends and precedents

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US courts are increasingly invalidating NCAs that are overly broad in terms of:

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• Geography. Territorial restrictions need to be reasonable given the company's area of operation.
• Duration. Restrictions cannot last too long.
• Compensation. Must be fair and proportionate.

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For example, in late 2024, the Delaware Supreme Court heard Sunder Energy, LLC v. Tyler Jackson and found Sunder’s NCA to be excessive. The court found that its terms would even have prohibited Jackson's daughter from selling Girl Scout cookies to her neighbors!

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And most recently, Amazon employees filed a class action lawsuit and accused the company of using NCAs, which are restricted in the state of Washington. Amazon had already lost a similar case in 2021, when a judge found a non-compete agreement “unreasonably overbroad, unenforceable, and in violation of Washington law.”

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Arguments against non-compete agreements

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NCAs have drawn criticism from professionals and regulators. The typical arguments are:

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• They reduce innovation and competition. The circulation of employees among companies fosters competition and encourages innovation. Non-competes can cause employees to lose motivation to explore new ideas and businesses to lose flexibility and competitiveness.
  
• They limit companies’ access to talent and workers’ salary growth. Without NCAs, compensation might be higher, and companies would have larger candidate pools. 
  
• They slow economic development. Non-competes hinder knowledge sharing and discourage entrepreneurship, making markets less dynamic in the long run.

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Alternatives to non-competes

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Given the criticisms of and legal challenges to competition clauses, some companies  use alternatives. Here’s an overview of the most common ones.

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Before choosing an alternative, it’s important to understand clearly what goal your company is pursuing. If you want to protect confidential information, an NDA is a better choice; if you just want to retain key customers and employees, try an NSA.

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International non-compete agreements

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Some countries regulate NCAs more strictly than the United States.

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• In the EU, employers are required to compensate the employee for the period of restriction. Amounts vary: in Germany, they must pay at least 50% of the employee’s annual salary. NCAs can last up to two years for executives and up to one year for other employees.
• In China, the employer has to pay at least 30% of the employee’s average monthly compensation while the NCA is active. Chinese courts sometimes support employers and sometimes side with employees.
• In the UK, employers need to show that NCAs protect legitimate business interests. In court, overly broad restrictions tend to get interpreted in favor of the employee.
• In Canada, regulations vary from province to province. For example, in Ontario, NCAS have been prohibited since 2021.

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The future of non-compete agreements

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Global trends suggest that the regulation of NCAs is becoming increasingly strict. Companies should review their current agreements and consider alternative protection strategies using NDAs and NSAs, develop access control policies, and get legal counsel to facilitate work in different jurisdictions.

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Mellow can help. Our service reduces the risk of managing contractors from any of 100+ countries and provides automatic transfer of intellectual property rights.

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