Non-Compete Clause Explained: Five Terms to Check Before You Sign
This page is general information, not legal advice.
A non-compete clause limits where and for whom you can work after you leave a job or end a contract. These clauses show up in employment agreements, contractor agreements, equity grants and sometimes in separate documents signed after you start. In the US, the rules vary a lot by state. Some states sharply restrict or void most employee non-competes. Others enforce them if a court finds them reasonable. Federal efforts to restrict non-competes, including an FTC rule, have gone through litigation and change, so check the current status yourself instead of relying on any summary, this one included.
The examples below are illustrative. They don't come from any real company's contract. For each one: what the clause might say, why it matters, and what to ask for instead.
1. Duration
A typical clause might read: "For a period of twenty-four (24) months following the termination of Employee's employment for any reason, Employee shall not, directly or indirectly, engage in any Competing Business."
Source: illustrative example, not taken from any real contract.
Why it works against you
The clock starts when you leave, "for any reason." That includes being laid off or fired without cause. A long restriction can keep you out of your field for years, and that's often where your earning power is. Some contracts also have a "tolling" provision that pauses the clock while you're allegedly in breach, so the restriction can last longer than the stated period.
What to ask for instead
Sample wording to propose: "The restricted period is six (6) months after employment ends. This Section does not apply if the Company terminates Employee without cause or if Employee's position is eliminated."
2. Geographic scope
A typical clause might read: "The restrictions in this Section apply anywhere in the United States and in any other country in which the Company does business or plans to do business."
Source: illustrative example, not taken from any real contract.
Why it works against you
"Plans to do business" can cover almost anywhere, and you can't see the company's plans. A nationwide or worldwide restriction can block remote work for employers that have nothing to do with your old territory or clients. Courts in some states may narrow or strike down overbroad areas. But you'd only find out after a dispute, and you'd be paying a lawyer to get there.
What to ask for instead
Sample wording to propose: "The restriction applies only within the metropolitan area where Employee primarily worked during the final twelve (12) months of employment."
3. Definition of "Competing Business"
A typical clause might read: "'Competing Business' means any person or entity that offers products or services similar to, or competitive with, those offered or under development by the Company or any of its affiliates."
Source: illustrative example, not taken from any real contract.
Why it works against you
Broad definitions turn a narrow restriction into a ban on whole industries. "Similar to" and "under development" are vague. "Any of its affiliates" pulls in every business line of a parent company, including ones you never touched. Read this definition next to the duration and geography terms, because together they decide how much of the job market you lose.
What to ask for instead
Sample wording to propose: "'Competing Business' means a business that sells [specific product or service] in direct competition with the Company, limited to the product lines Employee worked on in the final twelve (12) months of employment."
4. Non-solicitation of customers and staff
A typical clause might read: "Employee shall not solicit, accept business from, or service any client or prospective client of the Company, nor hire or attempt to hire any Company employee or contractor."
Source: illustrative example, not taken from any real contract.
Why it works against you
Non-solicitation clauses are often bundled with non-competes. "Accept business from" means you could breach the clause even when a client finds you on their own. "Prospective client" may include people you've never met. A no-hire term can also hurt former colleagues who want to follow you. These clauses often sit next to confidentiality terms, so compare them with NDA red flags.
What to ask for instead
Sample wording to propose: "For twelve (12) months, Employee will not actively solicit clients with whom Employee had material contact in the final twelve (12) months of employment. General advertising and unsolicited approaches are not a breach."
5. Remedies and penalties
A typical clause might read: "Employee agrees that any breach will cause irreparable harm, that the Company is entitled to injunctive relief without posting bond, and that Employee shall forfeit all unvested and vested equity and repay any bonus received in the prior twelve (12) months."
Source: illustrative example, not taken from any real contract.
Why it works against you
You agree in advance that a court can stop you from working, and that the company doesn't have to post the security that might otherwise protect you. Forfeiting equity and clawing back bonuses can cost more than the job itself. Check whether disputes go to arbitration, too. If they do, read mandatory arbitration clauses explained.
What to ask for instead
Sample wording to propose: "Remedies are limited to those available by law. Vested equity and bonuses already paid are not subject to forfeiture or repayment. The prevailing party in any dispute may recover reasonable attorneys' fees."
Also worth a look
Payment during the restriction. Some agreements pay you while you're restricted, sometimes called garden leave. If yours doesn't, it's reasonable to ask for it.
Choice of law. A clause may pick another state's law or courts. That can affect whether the non-compete holds up and where you'd have to defend yourself.
Timing. Being asked to sign a non-compete after you've accepted an offer is a warning sign. See job offer red flags.
Contractors. Freelancers and contractors also get non-competes, and these can clash with having many clients at once. See independent contractor agreement red flags.
IP assignment. Non-competes often come bundled with IP assignment. Read IP assignment clauses explained so side projects aren't swept in.
Whether a specific non-compete can be enforced against you depends on your state, your role, your pay and the exact wording. That's a question for a qualified employment lawyer where you live.
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This page is general information, not legal advice.
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Sources
- All clause examples on this page are illustrative and were written for this guide. They are not taken from or attributed to any real company's contract.