What Is a Noncompete Agreement?

You may have seen that the Federal Trade Commission (FTC) recently adopted a ban on noncompete agreements—meaning they’re now prohibited in most employment situations nationwide. At first glance, a noncompete agreement might sound like it contains a bunch of fancy legal jargon, but you don’t need a law degree to understand what this contract says.

But how does the FTC’s new ruling affect you and any noncompetes you may have signed? And what is a noncompete agreement in the first place? Let’s define this term and look at how noncompetes operate in the workplace. I’m also going to give you my take on signing noncompetes and whether it’s a good idea depending on your type of work.

What Is a Noncompete Agreement?

A noncompete agreement is a legal contract between an employer and employee that says the employee can’t enter into competition with their employer during or after their employment period. “Entering into competition” could mean working for a competitor, starting a separate company that could be seen as a competitor, giving away private information about the company or its clients, or a number of other actions that could put the business at risk.

The main purpose of these agreements is to protect the company and its ideas or products—often at the cost of worker opportunity. But noncompete agreements have both pros and cons, which we’ll get into a little later. First, let’s talk more about the FTC noncompete ruling.

Federal Trade Commission’s Final Rule on Noncompetes

In May of 2024, the FTC announced a rule banning noncompetes, partly because of their negative effect on the labor market. This Non-Compete Clause Rule—effective starting September 4, 2024—prevents employers from having employees or contracted workers sign noncompete agreements after they’re hired. It also cancels out existing noncompetes for the most workers because they stifle a fair job market, lower pay and limit worker mobility.

By getting rid of noncompetes, the FTC estimates that the number of new businesses will grow 2.7% per year (resulting in more than 8,500 businesses formed), average workers will earn an extra $524 per year, and the freedom to innovate will lead to thousands more patents filed.

Now, under this new rule, noncompetes are still active for senior executives who are already committed to an existing noncompete agreement. But beyond this small population of workers, getting rid of noncompete agreements will affect about 18% of U.S. workers, or about 30 million people. And if employers have existing noncompetes for other workers, they’ll have to let those workers know that the noncompetes won’t be enforced because they’re considered an “unfair method of competition.”¹

How a Noncompete Agreement Works

Even though noncompetes are going away, it’s still helpful to know how they work. They’re typically either a stand-alone document or a clause that’s part of a bigger employment contract. Both the employer and employee have to understand and okay the agreement before the employee signs it. Once both parties sign the agreement, it’s legally enforceable and an employer can take legal action if an employee violates it.

Noncompete agreements were difficult to enforce before the ruling, but now, employers can’t enforce them at all (outside of senior executives, who only represent 0.75% of the workforce).²

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If a company chooses to keep noncompete agreements for senior executives, they need to be fair and legitimate for both the employer and employee. The agreement must include details on these areas:³

• Limited duration: a concrete date when the agreement will begin and end, plus the length of time it prevents an employee from entering competitive situations
• Limited scope: reasons for having the employee sign the agreement and the companies or industries that are considered competition
• Limited geographic area: the location where the agreement prevents an employee from working
• Compensation: details about how the employee will be paid for or profit from agreeing to the terms

So far, so good? Let’s move on to learn about the types of jobs that usually require noncompete agreements.

Noncompete vs. Nondisclosure Agreements

What’s the difference between a noncompete and nondisclosure agreement? There’s a very simple difference between these terms: A noncompete agreement is a one-way street—it’s meant to prevent the employee from competing with the company in any way or helping its competitors. But a nondisclosure agreement is a confidentiality agreement that works both ways by keeping the employee from revealing sensitive information about the company and keeping the company from revealing sensitive information about their employees. And in case you’re wondering, the FTC ruling does not apply to nondisclosure agreements.

Which Jobs Use Noncompete Agreements?

A wide range of jobs use noncompete agreements. Traditionally, these have been jobs that involve private research or client information, like salespeople, scientists or corporate executives. But these days, anyone with insider knowledge about the company they work for may have been asked to sign a noncompete. Here are some examples of industries that might use noncompete agreements:

• Manufacturing
• Legal
• Financial services
• IT
• Product development
• Private medical practice
• Publishing
• Any kind of creative field

For example, as a Personality at Ramsey Solutions, I can’t go start a copycat radio show that gives people financial advice or write a book about the 7 Baby Steps.  

Pros and Cons of a Noncompete Agreement

With any legal agreement, there are going to be some pros and cons. Let’s go over the main ones to keep in mind when it comes to noncompete agreements.

Here are the pros. A noncompete agreement can:

• Protect trade secrets: This is a big pro for the company because it means employees won’t be able to share private information—like formulas, client lists, salaries, methods and practices, ideas, employee details, etc.—with competitors.
• Help lower turnover rates: Employees may be less likely to switch jobs after signing a noncompete, especially if they get extra compensation in exchange for signing the agreement and staying at the company.
• Motivate employers to provide more costly training: If companies know their employees won’t take the skills learned from their training and use them to get a job at another company, employers may be more likely to invest more money into the training itself.

Here are the cons. A noncompete agreement can:

• Reduce bargaining power for the employees: In other words, some employees may feel like they don’t have as many possibilities when it comes to negotiating pay or looking for other opportunities if they sign a noncompete agreement, depending on the terms.  
• Cause employees to leave their field: Some employees feel restricted by noncompete agreements, and as a result, they avoid jobs and career fields where they would have to sign one.
• Limit employee’s career growth: If an employee has to leave their job, a noncompete agreement can limit their options for a place to work next—and this could cap their earning potential.

My take on noncompete agreements? I think they’re necessary to protect certain companies and the hard work their employees put in, and if they’re crafted well, they don’t have to restrict what someone is able to do in the long term.

An employer shouldn’t be able to make a permanent call on the kind of work you can and can’t do for the rest of your life—even after you leave the company—so that’s why it can be helpful to involve employment attorneys in the process of creating and signing a noncompete agreement.

Here's a tip: If you don’t remember signing a noncompete agreement at your current job, talk to your HR team and confirm what was included in your hiring paperwork—and ask if your company will drop the agreement with the new ruling.

How to Move Forward with Noncompetes

At the end of the day, noncompete agreements are pretty simple, but they shouldn’t be taken lightly. You likely won’t be asked to sign a noncompete, but if you do, you’re responsible for sticking to the agreement you made—at least until September 4, 2024 (unless you’re a senior executive). So make sure you understand exactly what you’re agreeing to before you sign!

And if you’re an employer wondering how to create a noncompete agreement, I recommend talking with a law firm specializing in employment cases or a human resources professional who can show you the best way to write up a contract—and determine whether it’s even necessary for your current business and team.

But if you are offered a noncompete, I recommend speaking to an employment attorney. They can help you make sure your employer’s request is appropriate and that you know your rights as an employee. You can find a good employment attorney by getting a referral from another employee you trust or by contacting your local legal aid office and consulting with a few lawyers.  

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Noncompete information updated July 2024.