Introduction
This guide will help in-house counsel and private practice lawyers understand the rules regarding restrictive covenants. The guide provides information about how employers can use restrictive covenants to protect their trade secrets and how employers can draft enforceable restrictive covenants.
The guide covers:
- Overview of restrictive covenants
- Enforceability of restrictive covenants
- Key provisions in enforceable restrictive covenants
This guide can be used in conjunction with the following How-to guide: How to protect trade secrets in the employment relationship and Checklists: Work-for-hire and Drafting a non-compete agreement.
Section 1 – Overview of restrictive covenants
A restrictive covenant is a contractual agreement between an employer and employee which prevents the employee from taking a specified action during their employment and/or after the termination of their employment, with the aim of protecting the employer’s business.
1.1 Types of restrictive covenant
There are many different types of restrictive covenant. The four main forms are non-compete agreements, non-solicitation agreements, anti-raiding agreements and confidentiality agreements. These are further described below.
1.1.1 Non-compete agreement
A non-compete agreement is a contract between an employer and an employee prohibiting the employee from working for a competitor of the employer during their employment or after the termination of their employment. Such agreements can also be entered into with independent contractors or consultants.
Non-compete agreements can be an important tool for organizations to protect their legitimate business interests, as well as to limit an employees’ alternative employment options. Courts and legislators therefore tend to view non-compete agreements critically; meaning that it is important for employers to draft them very carefully if they are to be enforceable. Non-compete agreements typically last for between one and two years.
For further information see Checklist: Drafting a non-compete agreement.
A commonly used alternative to non-compete agreements is administrative leave. An administrative leave clause involves an employer paying an employee, who has given notice to terminate their employment, to ‘sit out’ of the business for a period of time (generally, their notice period) prior to the employee commencing a new role with a different employer. During a period of administrative leave, the employee remains employed by the employer, but is typically not expected to do any work, or even to be at the place of work.
In some cases, the administrative leave clause will provide for an employee to be compensated (sometimes at a reduced rate) for a specified time period after the termination of their employment but while they are subject to a non-compete agreement.
The time period of administrative leave clauses is usually limited to one to three months; meaning the cost to the employer is limited.
1.1.2 Non-solicitation agreements
Non-solicitation agreements are more limited in scope than non-compete agreements. They apply when an employee leaves their employment and takes up new employment with a competitor of their former employer. In that scenario, a non-solicitation agreement prohibits the employee from soliciting their former employer’s clients. As a result, these types of agreements are often imposed on employees who have extensive client contact or have access to client lists – for example, salespersons or assistants.
While courts are less wary of non-solicitation agreements than they are of non-compete agreements, any non-solicitation needs a logical basis in order to be enforceable. This means, for example, that any client list to which the departing employee had access to needs to hold value and be confidential. Non-solicitation agreements may last for months or, in some cases, years, but the length of the agreement should have a rational basis for protecting the interest of the employer.
1.1.3 Anti-raiding agreements
Anti-raiding agreements (also known as anti-poaching or no-hire agreements, or as a form of non-solicitation agreement) prohibit former employees from inducing other employees to leave the former employer and join the employee’s new – competing – business. Anti-raiding agreements usually apply for a specific time period after the employee’s departure. The time period will vary depending on what is required to protect the employer’s business interests. For example, a different approach will be required to protect the employer’s business interests when the departing employee worked as a warehouse stocker, compared to a departing employee who worked as a high-technology engineer.
1.1.4 Confidentiality agreements
Confidentiality (or non-disclosure) agreements prohibit former employees from using or divulging certain information concerning their former employer. While confidentiality agreements often relate to trade secrets, they may also apply more broadly to an organization’s proprietary or confidential information. As a result, a confidentiality agreement will no longer be enforceable if the information at issue has become public.
1.2 Competing interests to consider
Restrictive covenants can pit the interests of employees against those of their current or former employers. Restrictive covenants can potentially undermine the ability of an employee to earn a living, in particular, for employees who may not be earning high salaries or may have limited employment options in the geographic area they live in.
On the other hand, restrictive covenants are a valuable tool for organizations to protect their confidential and proprietary information, which can be key to their economic survival. In addition, in some cases restrictive covenants are important not only for legitimate business reasons, but also for the broader goal of protecting the public, for example, when restrictions protect confidential information in the healthcare context.
A balancing of competing interests is therefore required when dealing with restrictive covenants, and any such clause must be thoughtfully drafted in order to be enforceable.
Section 2 – Enforceability of restrictive covenants
Whether or not a restrictive covenant will be enforceable depends largely on state law. Until recently, common law set out the relevant factors to consider; however, in the last 10 years states have increasingly adopted statutes that address the enforceability of restrictive covenants. Meanwhile, there is also proposed action at the federal level which may become relevant.
2.1 Federal law
Although non-compete agreements have traditionally been regarded as matters of state law, federal regulators have taken an increasingly negative stance towards such agreements. The Federal Trade Commission (FTC) announced on April 23, 2024, a final rule banning non-compete agreements between employers and their workers (the Final Rule), with limited exceptions for existing non-compete agreements with ‘senior executives.’ Noting that such clauses bind about one in five US workers (or about 30 million people), the FTC maintained that non-competes both hurt workers and harm competition. See FTC Press Release: FTC Announces Rule Banning Noncompetes.
The Final Rule, which would have become effective September 4, 2024, was set aside in August by US District Judge Ada Brown of the Northern District of Texas in Ryan LLC v FTC, 2739 F. Supp. 3d 496 (N.D. Tex. 2024). Judge Brown ruled that the FTC lacked authority to issue the Rule and found it arbitrary and capricious under the Administrative Procedure Act. The FTC appealed, but after several extensions citing personnel changes, it moved on September 5, 2025, to dismiss the appeal and accepted the district court’s nationwide vacatur.
The FTC determined that employers have various alternatives to non-competes that allow them to protect their investments without enforcing non-compete agreements. Trade secret laws and non-disclosure agreements (NDAs) offer well-established methods for safeguarding proprietary and sensitive information. Employers should view the current landscape for non-compete agreements as unchanged. To ensure maximum enforceability, non-compete agreements should be reserved for employees with access to confidential and proprietary information.
In 2023, a bill limiting non-compete agreements was introduced in Congress (see S.220 - 118th Congress: Workforce Mobility Act of 2023). That bill died upon sine die adjournment of Congress in 2024. A related report on non-compete agreements by the Government Accountability Office provides further information on the use of such agreements in the US private sector. See Report to Congressional Requesters: Noncompete Agreements (May 2023).
Any organization seeking to enter into a non-compete agreement should perform adequate due diligence in the states where they have operations, to ensure that any agreements drafted or entered into will meet the specific requirements of those jurisdictions.
2.2 State law
2.2.1 Statutory and common law frameworks
In the past, state common law was the key factor in determining under what circumstances restrictive covenants were enforceable in a particular state. In the last 10 years, however, states have begun addressing this issue via specific statutes. Over half of US states have adopted statutes that regulate or prohibit restrictive covenants.
Under both common law and statutory provisions, restrictive covenants are typically permitted as long as they are ‘reasonable’. Determining ‘reasonableness’ depends on several factors. For example, Arkansas’ statute (Ark. Code, section 4-75-101) provides that such an analysis of a non-compete agreement should take into account:
- the nature of the employer’s protectable business interest;
- the geographic scope of the employer's business and whether or not a geographic limitation is feasible under the circumstances;
- whether or not the restriction placed on the employee is limited to a specific group of customers or other individuals or entities associated with the employer's business; and
- the nature of the employer's business.
Under Arkansas law, when a non-compete restriction is not reasonable, the law provides that the court can amend it and enforce the amended version.
Another example is the Texas Free Enterprise and Antitrust Act of 1983, which permits non-compete agreements that:
- are subject to reasonable limitations as to time, geographical area and scope of activity to be restrained; and
- do not impose a greater restraint than is necessary to protect a company’s goodwill or other business interest.
Texas also permits judges to adjust problematic covenants to render them enforceable.
2.2.2 Recent developments
Recent legislative efforts at the state level have largely focused on non-compete agreements, with an increasing number of states either banning non-competes or strongly limiting their enforceability. Some measures have been more targeted, by prohibiting non-compete agreements for low-wage workers or for select professions. The latter most commonly involve medical professionals, though some states prohibit non-compete agreements for high-tech workers, lawyers or broadcasters.
As of October 2025, nine states have adopted income thresholds for the enforceability of non-competes. Examples of states that have such protections for low-wage workers include Oregon, Virginia and Colorado. Other states will only permit ‘reasonable’ noncompete agreements protecting legitimate business interests, as long as they don't completely prevent former employees from working in their field, as in Montana. In Florida, noncompete agreements must be ‘reasonably necessary’ to protect legitimate business interests, with a six-month duration or less generally considered reasonable, and a duration of over two years generally be considered to be unreasonable.
California remains a difficult state for employers seeking to impose restrictions on employees. It has long severely limited the enforceability of non-compete agreements, with its Attorney General issuing an alert (‘Attorney General Bonta Reminds Employers and Workers That Noncompete Agreements Are Not Enforceable Under California Law’) in early 2022 to remind employers of that reality. In January 2024, Cal. Bus. Prof. Code section 16600.5 took effect. The law prohibits employers from attempting to enforce post-employment non-competes regardless of the location where the contracts were signed and whether the employment was maintained outside California.
In 2023, Minnesota enacted legislation that makes all non-compete agreements entered into after 1 July 2023 unenforceable. The new law applies to independent contractors as well as employees (see Minn Stat, section 188.988). Finally, in Colorado, violations of its restrictions on non-compete agreements carry various penalties including criminal penalties for using force, threats, or other intimidation to prevent someone from engaging in any lawful occupation at any place the person sees fit. See Colo. Rev. Stat, section 8-2-113
Section 3 – Key provisions in enforceable restrictive covenants
3.1 Key provisions in restrictive covenants
Although restrictive covenants are subject to increasing scrutiny by legislators and judges, keeping in mind several basic principles can help organizations to draft restrictions that are likely to be upheld as reasonable and therefore enforceable. For a list of specific elements to consider when drafting a non-compete agreement, see Checklist: Drafting a non-compete agreement (USA).
3.1.1 Setting limitations: geographic scope, duration and work covered
The more narrowly the restrictions are drafted, the more likely they are to be enforceable. Being specific in terms of the geographic region and time period covered is particularly crucial. The region that can reasonably be covered will depend on the specific circumstances of each case. The increase in remote working adds another complexity, as employers may legitimately fear that the activities of a former employee anywhere around the globe could harm their business interests. When drafting restrictive covenants for remote workers, instead of seeking to impose global restrictions, it may be more appropriate to focus on a clear description of the employer’s client base.
Specifying the time period of the restriction is more straightforward. Typically, the duration of restrictive covenants ranges between six months and two years. However, whether or not a specified time period will be deemed reasonable is often a very fact-specific inquiry. In some states, the relevant state statute may specify the permissible duration. For example, in Florida the law (Fla. Stat. section 542.335) sets out the durations that will at least initially be presumed to be either valid or invalid in specific circumstances.
When drafting restrictive covenants, it is also important to specify the type of work, services or activities that are prohibited. These should be unique to the business or otherwise proprietary or confidential. This means it is important to tailor such agreements to individual roles rather than trying to use broad template language that will likely be deemed to be too broad to be necessary to protect an organization’s legitimate business interests.
3.1.2 Consideration
Organizations seeking to impose restrictive covenants on employees need to ensure that they offer some form of ‘consideration’, or something of value, to employees who are asked to accept such restrictions. Typically, this requirement can be met by including the restrictive covenant in the initial contract of employment, as the new employment itself will be considered sufficient consideration. However, a separate form of consideration may be required for restrictive covenant agreements that are signed once an individual is already employed (eg, a bonus or job promotion).
The exact rules relating to consideration vary from state to state and are subject to ongoing development. When dealing with consideration, organizations should consult both common law and statute in the relevant state. For example, when Illinois introduced new limitations on restrictive covenants in 2022 (the Illinois Freedom to Work Act, 820 ILCS 90/1), it included a definition of ‘adequate consideration’ in the relevant statute. The law provides that the consideration requirement is met if the employee worked for the employer for at least two years after signing the restrictive covenant, or the employer otherwise provided benefits of a financial or professional nature, either alone or in combination with an (unspecified) period of employment.
3.1.3 Specifying the applicable law
With state law varying widely, in what state and forum any disputes over restrictive covenants are litigated can significantly affect the outcome. It may be advisable to include a clause specifying the choice of law and forum in the agreement containing the restrictive covenant. However, this must be thoughtfully drafted and must be reasonable. Specifically, the parties, or the agreement, must have a substantial connection to the state chosen.
Employers should be aware that including a choice of law and forum clause does not guarantee that their choice will be applied. Courts in a state with a stronger connection to the dispute may decide not to enforce a choice of law clause when doing so would contravene a fundamental policy of that state. In addition, some recent statutes addressing restrictive covenants explicitly counter the use of choice of law and forum clauses to circumvent the requirements they impose. For example, Massachusetts does so by requiring, under certain circumstances, the application of Massachusetts law or proceeding in specific in-state fora.
3.1.4 ‘Blue penciling’
State law sometimes provides the opportunity to amend problematic restrictive covenants to make them enforceable as modified. When a court makes such changes, this is referred to as ‘blue penciling’.
The majority of states (39) allow blue penciling. However, blue penciling is not permissible in all states and the circumstances under which blue penciling is an option also vary between states. For example, Louisiana requires a severability clause in the agreement in order to utilize blue-pencilling. See, Brock Services, L.L.C. v Richard Rogillio, No. 18-867-JWD-EWD (M.D. La. May. 18, 2020).
Some states limit blue penciling due to concerns that its availability encourages employers to draft overly broad restrictions as these can always be narrowed if a case actually makes it to court. Employers should therefore avoid any strategic intention to rely on blue penciling when considering and drafting restrictive covenants.
3.2 Remedies for breaches of restrictive covenants
Remedies for restrictive covenants typically involve equitable relief, including either injunctive relief or monetary damages, or a combination of the two.
3.2.1 Injunctive relief
An injunction is a court order that either requires a party to do something, or to refrain from engaging in certain activity. This is the most common form of remedy sought and granted for violations of restrictive covenants, in particular, non-compete agreements.
3.2.2 Monetary damages
Employers may also have incurred significant damages by the time an injunction is imposed and they can seek compensatory damages to recover some of their losses. However, in doing so requires proving the actual loss incurred due to the employee’s activities, which can be very difficult. Ultimately, such damages are often only awarded where truly valuable information was involved, and such cases also tend to entail malicious acts by an employee. See, for example, Mathew v Slocum-Dickson Medical Group, PLLC, 160 AD.3d 1500 (4th Dept 2018) in the context of non-compete provisions in cardiologists’ employment agreements with a large medical practice, where much of the business revenue was built on in-house referrals. When a group of physicians left the business, the ‘potential damages [were] caused by the loss of intra-organizational referrals, the loss of goodwill caused by the departure of critical members of its professional staff, the investment made by defendant in the development of plaintiffs’ practices and the cost associated with the recruitment of replacement physicians and the development of those new practices’.
One way to circumvent this hurdle is to include in a restrictive covenant a provision for liquidated damages. This provision specifies a set amount to be awarded as damages (or spells out a formula for calculating damages) should a violation occur. While such provisions are generally enforceable, they must not amount to a penalty, and courts will scrutinize them carefully when unequal negotiating partners are involved.
Employers should also keep in mind that, should the employee prevail in a legal dispute regarding a restrictive covenant, they may be able to recover their attorneys’ fees and costs from the employer. This is explicitly possible in Illinois, for example.
Additional resources
Government Accountability Office, Report to Congressional Requesters: Noncompete Agreements (May 2023)
Federal Trade Commission, Noncompete Rule
Seyfarth, 50 State Desktop Reference, What Businesses Need to Know about Non-Competes and Trade Secrets Law (2023 - 2024)
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