Developing a Noncompete Agreement: 4 Best Practices for 2022, Part 2 

Currently, a noncompete agreement is more challenging to implement or enforce than ever  before. This is due to factors such as: state law, court findings, and pressure from the Biden administration. More states are passing laws to limit or completely prohibit the powers of noncompete agreements. These laws don’t only apply to an employee signing a noncompete today.  They will often also retroactively protect employees who previously signed a noncompete agreement. Notably, courts in nearly every state are throwing out noncompete agreements.  These findings come from a desire to ensure businesses don’t prevent employees from earning their full potential in their chosen profession. HR experts and legal counsel often suggest employers review and update noncompete agreements.  In 2022, these documents must articulate a legitimate business interest in protecting trade secrets, client lists, and confidential information regarding products, or services. Agreements are likely to be rewritten or thrown out by a judge if they: prevent employees from taking action for too long a period of time, apply to too broad a geographical area, or are overtly focused on hobbling an employee from competing professionally. In part one of this two-part series, MP’s HR experts share best practices every employer should know about 2022 noncompete agreements. 

2 Best Practices for a Noncompete Agreement 

1. Noncompete agreements must not be written with an overly broad scope. 

Per current legal advice and guidance from HR experts, it’s critical that a noncompete agreement limits worker activity to a reasonable degree and reasonable geographic location.  As court decisions have shown (especially recently), noncompete agreements will be partially or fully unenforceable if drawn too broadly.  Consider these questions when reviewing these agreements: 

• Is this agreement being shared with the right employee?  In some states, employees who earn below a certain salary or hourly threshold cannot be bound by a noncompete agreement.  Even if it doesn’t run afoul of state laws, is a noncompete being applied to an employee who has access to confidential information, trade secrets, etc.?   At a lower level, many employees may not have enough access via their daily job duties to warrant a noncompete.  Would it truly hurt the business if this employee moved on to a competitor?   
• Does the agreement put more restrictions than necessary on the employee’s activities?  Courts will throw out or rewrite agreements that unnecessarily limit an employee’s ability to take a new job.  Agreements must be found “reasonable” by a court.  
• Does the agreement cover a reasonable time period or geographic location?  Restrictions on time must be based on factors such as the time it takes to train new employees, the time it takes for customers to build a relationship with employees, or the time it takes to eliminate the connection between the business and the former employee.  In terms of geographical scope, the agreement should only limit a former employee as far as the footprint of the business and its customers and prospects.  For example, if a company operates in New England, its noncompete should not limit employees from seeking competing roles in the Pacific Northwest. 

Beyond these existing questions, employers should keep an eye to the future of noncompete agreements.  In 2021, President Biden issued an executive order directing the Federal Trade Commission (FTC) to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.”  Though the FTC hasn’t taken action yet, employers should note the sentiment of this order.  President Biden (and many in his administration) are concerned that noncompetes are unfairly limiting low-wage earners and workers without college degrees.  He’s also worried that these agreements impact workers at all levels in their ability to earn their full potential in their chosen field.  In this order, he urges the FTC to ban noncompetes completely. 

2. Be mindful of timing. 

Employers should ensure they have new employees sign an updated, compliant noncompete agreement during the onboarding process.  It’s particularly challenging to add terms or have employees sign new agreements after they’ve already started a job.  If employers must have their staff sign a noncompete agreement later, they may consider tying it to a bonus.  In 2022, employers must consider employee engagement in everything they do.  Creating a strong culture of trust and psychological safety is key to retaining team members.  If an organization asks employees to sign new or retroactive noncompete agreements, they should consider how this will impact trust between employers and employees and, ultimately, employee retention rates.