How Do Noncompete Clauses Work?

An employee stands at the desk of another employee while they look at a tablet together.

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“My family operates an upscale Italian restaurant, and our employees are paid much more hourly than comparable establishments. We hire college grads, dedicate a great deal of time to training by certified hospitality educators, who cover everything from understanding the menu, to proper grooming, how to conduct yourself as a professional server and related skills.

“All restaurant owners face the same problem: hiring, training, and then the employee jumps ship for a similar restaurant, often for as little as a dollar more an hour. I have never used an actual signed employment contract, but wonder if I can have a noncompete clause, limiting an employee from working in a similar type of a restaurant within, say, 50 miles? Thanks, ‘Luigi.’”

The FTC voted in April 2024 to ban noncompete clauses, though business groups are challenging the ban in federal court, leaving businesses in limbo about whether to keep noncompetes for now or eliminate them. In 2023, a bipartisan group in Congress introduced the Workforce Mobility Act, which, if adopted, would also ban noncompetes across the U.S.

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To find out the ins and outs of noncompete clauses, I consulted with attorney Steven Kelly, former associate commissioner with the New York City Department of Consumer and Worker Protection. He is an instructor with Ontario, Canada-based LearnFormula, which provides continuing education and professional-development podcast courses.

Q: What is a noncompetition agreement?

Kelly: Preventing an ex-employee from competing with an employer has been a real issue going back — literally — hundreds of years. Typically, a noncompete is a clause in a contract, signed at the start of employment, that prohibits the employee from competing with the employer directly or indirectly for a specific duration of time and in a certain geographic area, after their employment has ended. If one party breaches the agreement, they may have to pay damages or cease certain activities.

Q: When does a noncompete make sense?

Kelly: This issue comes up instinctively where we have a highly skilled employee, and the company has invested thousands of dollars into their training. The employer does not want them to leave after benefiting from the training. A noncompete is reasonable and certainly makes sense in these situations, most business owners would say. Additionally, many employment contracts have a Training Repayment Agreement (TRA) that require repaying the cost of training if they leave the job before the end of a certain period. TRAs are often a take-it-or-leave-it proposition: No signed TRA, no job.

Q: How does this affect non- or low-skilled workers?

Kelly: Noncompetes are also being used with millions of non- or low-skilled workers who do not make very much money and are often unaware of being bound by one. This includes hairstylists, security guards, fast-food workers. For the benefit of their family, they would like to be more mobile and find a better-paying employer. This obviously makes no sense to most people, and noncompetes in these areas are being targeted at the state and federal level as being harmful to the individual worker, and our economy, by restricting mobility and keeping wages low.

Q: What does a noncompete clause look like?

Kelly: We all know the saying, “If it looks like a duck, quacks like a duck, it’s a duck,” and the same thing applies to noncompetes. First of all, it does not need to be a separate document that is entitled “Noncompetition Agreement.” Often, it is a paragraph buried within the onboarding package and might say, “Upon leaving the company, the employee is prohibited from working for another organization in the same industry or which competes with the employer within 100 miles for one year.”

Business owners must be well informed

Kelly makes it clear that employers need to be aware of the legal issues “that are evolving day-by-day,” adding, “There are several ways to be kept up to date, beginning with trade associations that are constantly monitoring developments at the state and federal levels, online research and scheduling a consultation with an employment attorney who represents business owners.”

He concluded our interview with a word of caution: “You need to be up to date with this stuff, as a violation could lead to expensive litigation. Yes, lawyers can be a cost you would like to avoid, but this is such an important issue and absolutely requires being kept informed.”

For lawyers, accountants and other professionals needing continuing-education credits, I recommend spending time on the LearnFormula website, which also provides info on this topic.

Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column, You and the Law. Through his column, he offers readers in need of down-to-earth advice his help free of charge. "I know it sounds corny, but I just love to be able to use my education and experience to help, simply to help. When a reader contacts me, it is a gift."