Frameworks governing non-compete clauses in employment contracts differ across jurisdictions. In some places, such as California, non-competes are simply unenforceable as an unreasonable restraint on trade. In other states, including Colorado, only employees earning above a set wage threshold and satisfying certain other requirements can be asked to agree to non-competes.
Generally, even in countries and regions that permit non-compete agreements, they’re only allowed if they protect legitimate business interests – trade secrets, trade connections, confidential information, workforce stability – and are reasonable in their duration and geographical scope.
Whether covenants are permitted isn’t set in stone. Historically, non-compete and non-solicitation clauses in Vietnam were regarded as unenforceable. In late 2023, a landmark Supreme Court decision recognized such clauses might be enforceable if they’re freely entered into by both parties and independent of the labor contract. To make clear a non-compete is independent, it should be in a separate agreement, not added to an employment contract or included in an annex to the contract. Clauses that are integral to the employment contract may infringe an employee’s right to freely choose a new employer, making the clauses void.
Non-competes are increasingly under scrutiny, though, even in countries and regions where they are an established feature of employment relationships. The focus is on striking the right balance between employer interests and employee freedom to use their skills. Governments hope restricting employers’ ability to rely on non-competes will foster innovation and drive economic growth, and the trend is toward shorter time frames and well-defined restrictions.
Paying for the inconvenience
Some jurisdictions that haven’t traditionally required employers to pay employees during their non-compete periods are shifting in favor of the practice. In the Netherlands, non-competes can last up to two years, and estimates report about 37 percent of the workforce are subject to these agreements. The Dutch cabinet proposed a bill in March 2024 to cut the use of non-compete clauses, while allowing them when there’s a compelling business interest. The business interest must be justified and apply to all employment agreements, whether indefinite or fixed term. Broadly, the new law would reduce non-competes to one year, with longer terms being void. The geographical scope needs to be justified; if not, the clause is void. But the employer still has freedom to customize the geographic scope to reflect the specifics of each case. If the employer wants to rely on a non-compete, it must confirm this in writing, along with the period of the restriction. And for each month the clause is invoked, the employer must pay the employee 50 percent (gross) of their last monthly salary. The government is still considering the proposal.
Five million employees are subject to non-competes in Great Britain, according to the last UK government. It had proposed limiting the duration of clauses to three months, down from a typical six or twelve, to promote competition and give workers more freedom to switch jobs. It decided not to press ahead with suggestions that employers should pay employees for the duration of a non-compete. But the last government didn’t impose any statutory restrictions, and the current Labour government hasn’t said if it will take the matter forward, even though it would be consistent with the current emphasis on growth.
Non-competes as a competition issue
The UK Competition and Markets Authority (CMA) sees restrictive covenants, particularly non-competes, as a competition issue that limits labor market efficiency. In its research report Competition and market power in UK labour markets, the CMA finds that non-competes affect about 30 percent of workers – rising to over 40 percent in ICT, scientific, and professional services. In fact, 26 percent of employees believe they have a non-compete clause in their contract. The EU also regards non-competes as potentially anti-competitive, though it typically focuses on business-to-business no-poaching or wage-fixing agreements in its enforcement activities.
Court blocks proposed nationwide ban
The United States has gone furthest in its attempts to tackle non-competes as a competition issue, but the position is up in the air. In April 2024, the Federal Trade Commission (FTC) finalized a nationwide rule estimated to void retroactively 30,000 non-compete agreements. Scheduled to come into force on 4 September 2024, the rule banned non-compete agreements, including agreements that tried to prevent a worker from seeking or accepting work. It made it unlawful to enter into, enforce, or attempt to enter into or enforce non-compete agreements with employees, independent contractors, interns, volunteers, or sole proprietors. And it required companies to tell workers, in writing, that their non-competes were no longer enforceable.
A federal court in Texas blocked the rule shortly before it came into force, setting it aside and banning the FTC from enforcing it nationwide. The FTC has appealed the decision, though it’s uncertain whether the agency will pursue the appeal under the new Trump administration. Without a successful appeal, non-competes remain enforceable, subject to state and local laws.
California has a long-standing policy against non-competes. Under a new statute, this applies not only to non-competes signed in California but also to those signed out of state. The new law seeks to void contracts that restrain employees from engaging in a lawful profession, trade, or business of any kind – regardless of where and when the contracts were signed – subject to limited exceptions. Entering into or trying to enforce void contracts is a civil violation, and an employee, former employee, or prospective employee can bring a private action for damages, injunctive relief, and attorneys’ fees and costs for violations. It’s unclear how broadly the new law will apply in practice and whether jurisdictional challenges will curtail the scope of the law outside California.
Finding a middle ground
Washington State has restricted non-competes since 2020. They’re void if longer than 18 months, if the employee earns less than an inflation-linked threshold, currently US$120,559.99, or if an employee is laid off and doesn’t receive compensation during the period of the non-compete. An amendment in 2024 widened the definition of a non-compete to include an agreement that “prohibits the acceptance or transaction of business with a customer” and narrows the definition of a non-solicitation agreement from soliciting “any” customer to “current” customer, among other changes.