The Pros and Cons of Non-Compete Agreements

What is a Non-Compete Agreement?

Non-compete agreement contracts are legally binding ‘restrictive covenants’ that prevent an employee from joining a competing company for a certain length of time after their position at a company ends.

Industries that most commonly use non-compete agreements include the corporate world, sales positions, information technology, manufacturing, financial services, and media. But other industries may also consider including non-competes in their hiring practices.

Today we’re going to explore some of the pros and cons of non-compete agreements in order to help you decide whether it’s the right option for you and your business. And, as always, we recommend contacting the S.T. Legal Group law firm for a more detailed analysis of your particular business aspirations so that you have a more informed understanding of non-compete clauses and your goals.

What Are Some of the Advantages of Non-Compete Agreements?

Favored more by employers than employees, these agreements are primarily utilized to prevent training methods and trade secrets from leaving their business and strengthening the business of a direct competitor. But there are several other benefits that business owners and staff management may consider when deciding whether to sign new hires to non-competes.

Businesses Can Reduce Workforce Turnover

Non-compete clauses restrict a worker’s employment options if they should leave your company. Because of this, a non-compete may help reduce worker turnover, as your employees decide it’s better to stay where they know they can put their skills to use.

Employees Can Get Locked Into Long-Term Positions

This could be considered a pro for both the employer and the employee. For the employer, it means their worker will be in their position for a long time to come. For the worker, it could mean added job security.

Encourages Companies to Invest in Employees’ Futures

If a company has additional reason to trust that an employee is invested in the company’s future, it may make the company more confident in investing in the employee’s future.

When they know that the employee cannot take what they learn elsewhere, employers are more apt to provide extra training and resources, potentially fostering innovation among the workforce.

Companies Can Protect Trade Secrets

Perhaps the key takeaway is that employers can protect their trade secrets, training practices, and more from falling into the hands of the competition. If your company has a top-secret formula, you understandably do not want that formula to be known by your competitors. By requiring your employees to sign a non-compete clause, you can defend against the possibility of a competitor learning such a secret.

What Are Some of the Disadvantages of Non-Compete Contracts?

Just as there are several benefits to non-compete contracts, there are also many downsides to consider as well. Ultimately, deciding whether to require non-compete agreements is up to you. You may even decide it’s not a company-wide requirement but something reserved for only certain job positions.

Employees Lose Bargaining Power

When a worker is signed to a non-compete agreement, they may find themselves unable to bargain for higher pay or benefits. This might sound good to the business owner, but curbing wages hurts worker morale and can send the wrong message to future prospective employees.

The Federal Trade Commission Might Ban Non-Competes in the Future

In early 2023, the Federal Trade Commission (FTC) proposed a new rule banning non-compete agreements. The FTC argued that if the rule was enacted, it could increase worker wages by nearly $300 billion annually, providing millions of American workers with new career opportunities. While the proposed rule is not in effect yet, it could one day become the new norm in employment law.

Can Be Bad for Innovation

Evidence suggests that while noncompetes may help protect the future of a specific business, they may actually be bad for industry growth since noncompetes restrict former employees from launching startups and pursuing new career opportunities.

They Are Unappealing to In-Demand Job Candidates

Non-compete agreements benefit the company but are generally frowned upon by new prospective employees. Employees know this and could be wary about signing with a company that restricts their future career opportunities.

If a competitor offers a similar position with no non-compete agreement contract requirements, the employee may sign with the other company instead of yours.

They Can Be Costly

If a former employee breaches their non-compete contract, you must sue them. A lawsuit can be costly. And if the former worker cannot pay the damages due, it may not be worth it for the company.

Illinois Has High Standards When it Comes to Non-Competes

Illinois courts only enforce non-compete agreements when they determine that a former employer’s business concerns are ‘reasonable and necessary.’ As such, even if a non-compete clause is in place, it may not be enforceable in all circumstances.

Contact the S.T. Legal Group to Discuss Your Case Today

While we hope this page has helped elaborate some of the pros and cons of non-compete restrictive covenants, the only way to be sure whether such an agreement suits you is to discuss your unique case in more detail. To do that, please contact our law firm to discuss your business needs with our experienced legal team. S.T. Legal Group has years of experience representing clients on both sides of employment law in Illinois, and we would be proud to provide you with our dedicated legal services.