What Is a Non-Compete Agreement?

At first glance, “non-compete agreement” might sound like some kind of fancy legal jargon. And it is a legal matter, but trust me, it’s not as intimidating as it sounds. It’s important to know what a non-compete agreement is in case you’re ever asked to sign one, or in case you own a company one day and choose to have your employees sign one. Let’s dive in so you can understand exactly what a non-compete agreement is and how it works—no law degree required!

What Is a Non-Compete Agreement?

A non-compete agreement is a legal agreement between an employer and employee that says the employee can’t enter into competition with their employer during or after the time spent working for them. “Entering into competition” could mean working for a competitor, starting a separate company that could be seen as a competitor, giving away private info about the company, or a number of other things that could be bad for business.

The main purpose of a non-compete is to protect the company and its ideas or products. But non-compete agreements have a few pros and cons for the employees as well, which we’ll get into a little later. First, let’s talk more about how this thing actually works.

How a Non-Compete Agreement Works

If someone is pursuing a job that requires signing a non-compete, they’ll usually find out about it during the hiring process, right before they’re hired, or shortly after they’re hired. In some cases, though, an employer might decide to ask their employees to sign one after they’ve already been working at the company for awhile, depending on changes in their role or workload or changes in the company’s products.

The non-compete agreement might come in the form of a standalone document or a clause that’s part of a bigger contract. Both the employer and employee have to understand and authorize the agreement before the employee signs it (that part is extra important)!

There are a few things that non-compete agreements need to have in order to be fair and legitimate for both the employer and employee. The agreement has to include:

• A concrete date when the agreement will begin
• A reason for having the employee sign the agreement
• Concrete dates for when the employee can’t work competitively, plus the location that’s covered by the agreement
• Details about how the employee will be compensated for agreeing to the terms

So far so good? Let’s move on to learn about the types of jobs that usually require non-compete agreements, so you can see if this might apply to you.

Which Jobs Use Non-Compete Agreements?

There are a wide range of jobs that use non-compete agreements. Traditionally, these have been jobs that involve a lot of top-secret research or information, like scientists or corporate executives. But these days, anyone who has insider knowledge about the company they work for could be asked to sign a non-compete. Employees who work in food or drink manufacturing, sales, IT, product development, publishing, news or any kind of creative field are all examples of people who this might apply to, but there are plenty of others. Even yours truly signed a non-compete agreement! That’s right—as a team member 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. (Good thing I love what I’m doing now!)

Pros and Cons of a Non-Compete 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 non-compete agreements.

Here are the pros. A non-compete agreement can:

• Protect trade secrets. This is a big pro for the company because it means employees won’t be able to share private info—like formulas, salaries, methods and practices, ideas, employee details, etc.—with competitors.
• Help lower turnover rates. Employees who don’t have any desire to switch jobs in the future may feel that an employer who requires them to sign a non-compete is a good match for them.
• 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 non-compete agreement can:

• Create less bargaining power for the employees. In other words, some employees feel like they don’t have as many possibilities when it comes to negotiating pay or looking for other opportunities if they sign a non-compete agreement, depending on the terms.  
• Cause employees to leave their field. Some employees feel restricted by non-compete agreements, and as a result, they avoid jobs and career fields where they would have to sign one.

My take on non-compete 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 for employment attorneys to be involved in the process of creating and signing a non-compete agreement.

Non-Compete vs. Non-Disclosure Agreements

You might’ve heard both of these terms thrown around, and it can get confusing because they sound pretty similar. But there’s a very simple difference between the two: A non-compete 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 non-disclosure agreement is a confidentiality agreement that works both ways by keeping the employee from revealing sensitive info about the company and keeping the company from revealing sensitive info about their employees.

At the end of the day, non-compete agreements are pretty simple, but they shouldn’t be taken lightly. You get to choose whether or not you sign one, and once you do, you’re responsible for sticking to the agreement you made. So, make sure you understand exactly what you’re signing up for (before you sign)!

If you’re asked to sign a non-compete agreement and you’re not sure if you understand the terms—or even if you do understand the terms and you just want to double-check that you read everything correctly—remember it’s a good idea to speak to an employment attorney. They can help you make sure your employer doesn’t limit you beyond the scope of what’s typical or appropriate and that you know your rights as an employee. You can find a good employment attorney by contacting your local legal aid office and consulting with a few lawyers before deciding on one, or by getting a referral from another employee you trust. You’ve got this!

For more career advice, check out my new book, From Paycheck to Purpose. In it, I’ll walk you through the clear path to finding and doing work you love, with plenty of strategies for making the best career moves for you!