Is your company still using a noncompete? Here are things to consider.

A noncompete is a contract between an employer and an employee where the employee agrees not to compete with the company. These agreements usually last during employment and for six months to two years after employment ends. Noncompetes face a few hurdles in the remote work environment - not least of which is a potential federal ban. If a federal noncompete ban goes into effect, it’s game over for most employee noncompetes. However, assuming some employee noncompetes remain enforceable, employers should consider a few things.

First, companies must remember that many states limit or outright prohibit noncompete agreements. So before you have your employee sign a noncompete, especially if you have remote employees in other states, make sure you’re not running afoul of applicable law wherever that employee lives. You don’t want to be slapped with an unfair business practice claim. 

Second, even in states where noncompetes are allowed, they can be complicated to enforce. Noncompetes generally must include a “reasonable” geographical scope. But defining this is challenging. Reasonable is often in the eye of the beholder. And for remote roles, or companies that operate or compete statewide, nationwide, or worldwide, the ability to craft a reasonable geographic scope that still protects the company is complicated. Most noncompetes include 20, 50, or even 100-mile radius restrictions on competition. But for low-level earners or positions, that might not be reasonable because it’s too broad, while for high-level earners with key roles, it’s not broad enough. That’s why a one-size-fits-all approach rarely makes sense. 

Developing a reasonable geographic range when employment, customers, and markets are global is challenging and requires nuance. Enforcing a broad noncompete is usually quite difficult. One solution is to tie the geographical restriction to corporate headquarters rather than the employee’s work location. But this might make the noncompete of little value. 

That said, there are some situations where a noncompete makes sense. For example, if you buy a business and keep the previous owner on as a remote employee, you should consider a noncompete so the employee does not rush off and start a competing company. Even if the Fair Trade Commission’s non-compete ban holds up, this will likely remain acceptable.

You should also consider a noncompetition agreement if you invest substantially in a critical employee by paying for significant training or developing specialized expertise. But limit your expectations. Consider whether a nonsolicitation agreement, which is much more likely to be upheld by a court, makes more sense.

A nonsolicitation agreement is similar to a noncompete. But there are key differences. The most crucial difference is that it does not mandate that your employee stay out of the industry. Instead, it requires that your employee not solicit employees or customers away from your company. In other words, employees who agree to a nonsolicitation agreement cannot recruit your customers or employees, even if they can work in the same industry as your business. Competition is allowed. Unfair competition is not. 

Like a noncompete, a nonsolicitation agreement should be reasonable. The goal shouldn’t, and cannot be, to permanently stamp out competition. The goal is to help ensure your business is not subsidizing your competitor’s recruitment and advertising costs.

A nonsolicitation agreement encourages fair competition. Competitors should build their business on their dime rather than yours. Most states will enforce nonsolicitation agreements. But check your state’s law before you jump to any conclusions. Some states might see a nonsolicitation agreement as a backdoor attempt to smuggle in an illegal noncompete. Work with your attorney to make sure you get it right.