Non-Competes and the Changing Law

A non-compete agreement tries to stop someone — an employee, or sometimes a contractor or a business seller — from working for a competitor or starting a competing business for a set time and in a set place after they leave. Whether that promise actually holds up is one of the fastest-moving areas of American business law right now: a federal agency tried to ban most non-competes nationwide, that effort collapsed in the courts, and states have kept moving in their own directions — some banning non-competes almost outright, most enforcing them only if they're "reasonable." If you're an owner asking employees to sign one, or a worker who's been asked to sign one, the honest answer is: it depends heavily on your state, and it depends on today's law, not last year's headline.

What a non-compete actually restricts

A non-compete (sometimes called a "covenant not to compete" or "restrictive covenant") limits where someone can work, or whether they can start a competing business, for a period of time after leaving a job — usually defined by a time limit (say, one year), a geographic area, and a scope of prohibited work. It's different from other common restrictions employers use, and mixing them up matters:

• Non-disclosure agreements (NDAs) protect confidential information and trade secrets. They don't stop someone from working for a competitor — they stop them from using or sharing your specific confidential information. Courts in almost every state enforce reasonable NDAs far more readily than non-competes, because they don't block someone from earning a living.
• Non-solicitation clauses stop a departing employee from poaching your customers or your remaining staff for a period of time. These are also generally easier to enforce than a flat non-compete, because the person can still go work in the industry — they just can't raid your client list or your team on the way out.
• Non-competes go furthest: they can stop someone from doing their job at all in a given field and place for a period of time. That's why they get the most legal scrutiny, and why enforceability varies so much by state.

Treat these as three separate tools with three different enforceability standards — voiding a non-compete doesn't void the NDA or non-solicitation clause sitting next to it in the same contract.

The federal picture: a rule that rose and fell

In 2024 the Federal Trade Commission (FTC) issued a rule that would have banned most new non-competes nationwide and voided most existing ones for workers other than senior executives. Federal courts split on whether the FTC had the legal authority to issue it — one set the rule aside nationwide, while another blocked it only as to the parties before it. Rather than keep fighting through the appeals courts, the Commission voted to drop its appeals, and it has since formally removed the non-compete rule from the federal regulatory code.

What that means in practice: there is currently no federal rule banning or capping non-competes. Non-compete law is, for now, state law. The FTC has said it intends to keep policing non-competes on a case-by-case basis under its general unfair-competition authority — meaning a specific overbroad or coercive non-compete could still draw federal scrutiny even without a blanket rule — but that is a narrower, slower-moving tool than the rule that was struck down.

This is exactly the kind of area where "the law" can look different next year. Before you rely on any summary of federal non-compete policy — including this one — check the FTC's own noncompete page at ftc.gov for the current status, since this has changed more than once in the past two years and could change again.

The state picture: bans, limits, and "reasonableness"

With no active federal rule, whether a non-compete is enforceable comes down to the state whose law governs the agreement (often, but not always, the state where the employee works). States fall roughly into three groups, and which one your state is in can change with each legislative session:

• A small number of states treat most employee non-competes as void outright, regardless of how reasonable they are, with only narrow exceptions (for example, tied to the sale of a business). A few other states are moving toward joining them, with new bans phased in on future effective dates.
• Many states enforce non-competes only if they're "reasonable" — reasonable in duration, reasonable in geographic scope, and reasonable in the type of work restricted, and only when there's a legitimate business interest to protect (like real trade secrets or genuine customer relationships, not just wanting to avoid competition). A court applying this test can strike down a non-compete that's too broad — too long, too wide a territory, or too sweeping about what work it bans.
• A growing number of states restrict non-competes for specific groups rather than banning them outright — for example, exempting lower-wage workers, requiring the employer to pay the worker during the restricted period, requiring advance notice before the person signs, or setting an income floor below which a non-compete can't be enforced at all.

Because these rules — which states ban them, which set income thresholds, what "reasonable" duration or territory means in practice — change through state legislation and court decisions on an ongoing basis, this guide won't try to list them state by state. Look up your specific state's current statute or check with your state's business or labor agency, or a local employment attorney, before you write, sign, or try to enforce a non-compete.

If you own the business: using non-competes carefully

If you're asking employees or contractors to sign a non-compete, the biggest risk isn't that a court enforces it too broadly — it's that a court throws the whole thing out because it reaches too far. An overbroad non-compete (too long a time period, too wide a geographic area, or written to cover far more than the legitimate interest you're protecting) can be declared void in some states, and in others a judge will narrow it down to what's reasonable — but you can't count on that judicial fix everywhere, so drafting narrow from the start matters.

What to do

1. Confirm whether non-competes are even usable in your state before you put one in an offer letter or employee handbook. A boilerplate template written for a different state can be worthless — or worse, can create liability for you — where you actually operate.
2. Reach for the narrower tool first. If what you actually need is to protect confidential information or stop client-poaching, an NDA or a non-solicitation clause may accomplish that with far less legal risk than a full non-compete.
3. If you do use a non-compete, keep it narrow and tied to a real interest — the shortest duration, smallest territory, and narrowest description of restricted work that actually protects trade secrets, real customer relationships, or specialized training you invested in. "We'd just rather they not compete with us" is not, by itself, treated as a legitimate interest in most states.
4. Check whether your state requires notice, consideration, or income thresholds. Some states require you to tell a new hire about a non-compete before they accept the job, or require it be signed in exchange for something of value, or exempt anyone below a certain pay level.
5. Get a lawyer to review it before you use it. Because enforceability turns on state-specific statutes and case law that keep changing, a template you find online — or one written for a different state — is a poor substitute for a document reviewed by counsel licensed where your workers are.

If you're a worker or contractor asked to sign one

Read the agreement before you sign it, and specifically look at what job or industry it restricts you from, for how long, and in what geographic area. If you're later deciding whether to leave for a competitor or start your own business, don't assume the non-compete you signed is automatically enforceable — its validity depends on your state's current law, and a court may find it unenforceable as written, especially if it's unusually broad. That said, don't assume the opposite either. This is a case where a short consultation with an employment attorney in your state — before you take a competing job, not after you're sued — is worth far more than a guess. (Observed.org's employment coverage addresses the employee side of workplace disputes in more depth if a non-compete becomes part of a larger dispute over your job.)

Selling a business is a related but separate situation: a non-compete signed as part of selling your company is generally viewed differently — and often enforced more readily — than one an employer imposes on a hired worker, because the seller was paid specifically for that promise. If you're negotiating the sale of your business, have your own attorney review any non-compete in the purchase agreement separately from the rest of the deal.

The bottom line

The federal government tried and failed to set one nationwide rule, so — for now — this is a state-by-state question, and it is genuinely still moving: several states have adopted bans or added new limits in just the past couple of years, and the FTC has signaled it isn't done watching this area even without its rule in place. Whatever you read about non-competes, including this article, treat it as a snapshot and confirm the current rule in your state — and the current federal posture at ftc.gov — before you sign, draft, or try to enforce one.

This article is general information, not legal, tax, or financial advice.