About the Author
In 2018, Kelly first supported Paylocity’s Spending Accounts and Benefits products before transitioning to her current role, providing comprehensive compliance and regulatory support for Paylocity’s entire suite of HCM products.
Human Resources
Which States Ban Non-Compete Agreements?
Investigate how non-compete agreements function and which states restrict or completely ban employers from using them.
What is a Non-Compete Agreement?
A non-compete agreement (a.k.a. non-competition agreement or restrictive covenant) is a contract or clause that limits one party’s ability to engage in activities that could directly compete with another party for a specific period or within a defined area. While commonly associated with employment contracts, non-compete clauses can also appear in contracts for business sales, partnerships, or consulting arrangements.
In employment settings, a non-compete clause often prohibits former employees from working for a competitor, creating a new business that competes with the employer’s, or using valuable knowledge gained during the employment as an advantage when trying to compete with the employer. Moreover, a typical non-compete contract clause will also include penalties for violating the agreement.
Key Takeaways
- Non-compete agreements are contracts or clauses that allow employers to prevent former employees from competing with their business after the employment ends.
- In 2024, a new federal ban on non-compete agreements created by the Federal Trade Commission (FTC) was struck down by a US District Court before it went into effect.
- Non-compete agreement law varies by state, with most implementing only partial restrictions on non-compete clause use.
Non-Disclosure Agreement vs. Non-Compete Agreement
While they can both appear (sometimes together) in an employment contract, a non-compete clause and a non-disclosure agreement impose very different limitations on former employees. Simply put, non-compete agreements restrict where and whom a former employee can work for, while non-disclosure agreements restrict what information a former employee can share with others.
For example, suppose an employee’s role requires the use of confidential or proprietary data the company needs to protect. In that case, that worker’s employment contract may have a non-disclosure clause prohibiting them from sharing said data after the employment ends. Conversely, a non-compete agreement may only prohibit the employee from getting a new job with another company in the same industry and region for five years.
How Does a Non-Compete Agreement Work?
Non-compete agreements can be adjusted and tailored to suit an individual employer’s unique needs, but some standard components include:
- A list of the exact roles, tasks, and responsibilities the agreement restricts.
- A description of the types of businesses or industries considered to be competitors.
- How long restrictions last, and where they geographically apply.
- The penalties incurred for violating the agreement.
Are Non-Compete Agreements Enforceable?
To be enforceable, non-compete agreements in job contracts must balance protecting legitimate business interests and the employee’s ability to earn income. Overly restrictive requirements may face legal challenges for unreasonably interfering with an employee’s livelihood.
Heads Up! Federal Non-Compete Ban
In 2024, the Federal Trade Commission (FTC) challenged the legality of non-compete agreements by creating a federal non-compete agreement ban.
That ban, however, was later struck down by a US District Court before it could take effect. In its ruling, the court relied on an interpretation of the Administrative Procedure Act (APA) and the US Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo to determine the federal ban exceeded the FTC’s rulemaking authority.
The FTC appealed the court’s decision, but until the appeal is resolved, non-compete agreement compliance will continue to be based on state law.
Refer to our Compliance and Tax Alerts page for non-compete agreement ban updates as they occur.
Non-Compete Agreements by State
Non-compete agreement law is governed at the state level, with restrictions and penalties for noncompliance varying between jurisdictions.
For example, only a handful of states consider non-compete agreements unenforceable and impose a statewide non-compete ban. Other states have partial restrictions on how organizations enforce such agreements, while some have none at all.
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Complete Ban |
Partial Restrictions |
No Restrictions |
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Alaska Michigan Mississippi Nebraska North Carolina Ohio South Carolina West Virginia Wisconsin
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Avoid Compliance Headaches with Paylocity
The FTC estimates that 30 million employees nationwide are covered by a non-compete agreement. Even in states with no non-compete restrictions, former employees can challenge the validity of such clauses for being unreasonable. Given how widely state laws vary, employers who use a non-competition agreement should prioritize understanding every compliance obligation where their business operates.
This is where having the best payroll compliance software can make a world of difference. Specifically, integrated platforms with tools dedicated to:
- Uploading and storing important documents
- Applying the latest legislative updates
- Recording and verifying a worker’s employment status or classification
Request a demo today and see how much easier payroll compliance can be.
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