NDA vs Non-Compete and What an NDA Can Restrict

An NDA restricts what someone may disclose or use, while a non-compete restricts where and for whom they may work. You can put a non-compete clause inside an NDA in many states, but doing so imports every state limit on non-competes, and in California and a few other states it is void. A clean NDA protects information without limiting future work.

That distinction sounds simple, yet many disputes start with an agreement titled "Non-Disclosure Agreement" that contains a clause no one read carefully. This article explains what each type of agreement does, what an NDA can lawfully restrict, where the current federal and state rules stand, and how to spot a non-compete hiding in confidentiality language.

What an NDA does and does not do

A non-disclosure agreement protects information. It says the recipient may use confidential information only for a stated purpose, may not disclose it except as allowed, must protect it with reasonable care and must return or destroy it at the end. It does not stop the recipient from taking a job, starting a company or selling to the same customers, as long as they do it without using the protected information.

Our employee NDA template states this directly in a clause called "No restriction on later work", which says the agreement protects confidential information only and does not prevent the employee from working for any other employer or in any business after employment ends. That sentence is there on purpose. It keeps the agreement on the confidentiality side of the line, which is where courts in nearly every state are comfortable.

What a non-compete does

A non-compete, or covenant not to compete, restricts a person from working for a competitor, starting a competing business or serving certain markets for a period after the relationship ends. Because it limits how someone earns a living, US law treats it as a restraint of trade. Most states enforce non-competes only if they protect a legitimate business interest and are reasonable in duration, geography and scope, and an increasing number of states restrict or ban them outright for workers.

NDA, non-solicit and non-compete compared

Can you put a non-compete clause in an NDA

Legally, the title of a document does not matter. A non-compete clause inside an NDA is analyzed as a non-compete. That has three consequences.

1. The clause must meet the state's non-compete rules. If the state requires advance notice, a minimum salary, extra consideration or a short duration, the clause in the NDA must meet those too.
2. It can taint the agreement. Most well drafted NDAs have a severability clause, so a court may strike the non-compete and keep the rest. Some courts blue pencil or narrow the clause, others refuse to rewrite it, and a few states penalize employers for including void terms at all.
3. It slows down signing. Employees, contractors and business partners who would sign a plain NDA in a minute often stop at a non-compete and ask a lawyer. In commercial deals, it is one of the most frequent reasons an NDA bounces back.

In practice, most employers and deal teams keep the NDA clean and, where a restriction on competition is both justified and legal, put it in a separate agreement that can be reviewed on its own terms.

Where federal rules stand

The FTC non-compete rule

In 2024 the Federal Trade Commission adopted a rule that would have banned most worker non-competes nationwide. Before it took effect, the FTC's 2024 nationwide ban was set aside by a federal court and the agency later dropped its appeal. As a result, there is no general federal ban in force, and non-competes remain governed mainly by state law. The FTC has said it can still challenge specific non-competes case by case as unfair methods of competition, so a sweeping clause imposed on low wage workers still carries federal risk. The rule text was also notable for treating very broad NDAs that prevent a worker from using general skills in a new job as functional non-competes, an idea some courts already apply.

The NLRB

For non-supervisory employees covered by the National Labor Relations Act, the National Labor Relations Board has taken the view that overly broad confidentiality and non-disparagement terms can interfere with employees' rights to discuss wages and working conditions and to act together. In its 2023 McLaren Macomb decision, the Board held that offering severance agreements with broad confidentiality and non-disparagement clauses can itself be unlawful. The Board's general counsel issued guidance treating most non-competes as unlawful too, though later guidance from a new general counsel withdrew that memo. Positions at the agency shift with its membership, so the safe practice is a confidentiality clause that is clearly limited and an express statement that employees keep their protected rights. Our employee and contractor templates include a protected activity clause for exactly this reason.

The Speak Out Act and the DTSA notice

Two other federal rules affect employee NDAs. The Speak Out Act makes pre-dispute non-disclosure and non-disparagement clauses unenforceable in sexual assault and sexual harassment disputes. The Defend Trade Secrets Act requires employers to give individuals notice of whistleblower immunity in agreements that govern confidential information, or lose the ability to recover exemplary damages and attorney fees under the DTSA. The notice appears automatically in our employee and contractor NDAs.

California, Business and Professions Code 16600 and 16600.5

California is the strictest major state. Section 16600 makes void every contract that restrains anyone from engaging in a lawful profession, trade or business, subject to narrow exceptions such as the sale of a business or the dissolution of a partnership. Courts there have read it broadly. A non-compete is void, customer non-solicitation clauses are generally void, and an NDA drafted so broadly that it effectively stops someone from working in their field can be void too.

Section 16600.5, effective in 2024, adds that a void non-compete is unenforceable regardless of where and when the contract was signed, and that an employer may not try to enforce one or enter into one. Employees can sue for injunctive relief and actual damages and recover attorney fees. A related provision required California employers to notify affected current and former employees that earlier non-compete clauses are void. For companies hiring in California, the lesson is to remove non-competes from templates entirely, not just stop enforcing them.

Other states, notice and income thresholds

Outside California, the landscape is a patchwork that changes often. A few patterns are common.

• Outright bans for workers. Minnesota, North Dakota and Oklahoma prohibit most employee non-competes, with exceptions mostly around the sale of a business.
• Income thresholds. Several states, including Washington, Colorado, Illinois, Oregon, Maine, Maryland, Rhode Island and Virginia, void non-competes for workers below a salary level or for low wage or hourly workers. Many thresholds adjust each year, so check the current figure.
• Notice requirements. Some states require that the employee receive the non-compete in advance, in a separate document or with time to consult a lawyer. Massachusetts, Colorado, Illinois, Washington and Oregon are examples with specific timing or form rules.
• Industry limits. Many states restrict non-competes for physicians, other health care workers or broadcast employees.
• Choice of law limits. Several states refuse to let an employer pick another state's law to get around local protections for employees who live and work there.

Because these rules vary so much, our employee and contractor templates include a local law clause that lets the law of the state where the person primarily lives and works apply where that state requires it.

How a hidden non-compete shows up in an NDA

The problem clauses are rarely labeled "non-compete". Watch for wording like this.

• The recipient will not "engage in any business that competes with" the discloser during the term.
• The recipient will not "develop, market or sell any product similar to" the discloser's products, without an exception for independent development.
• Confidential information is defined to include general skills, industry knowledge or everything the person learns on the job.
• A non-solicitation of customers covers every customer of the discloser, not only those the recipient met through the deal.
• An exclusivity or "right of first refusal" clause that limits doing business with others.
• An IP assignment that gives the discloser ownership of anything the recipient builds in the same field.

Each of these goes beyond protecting information. When you review counterparty paper, AI contract review in NonDisclosures flags a non-compete or IP assignment hidden in an NDA as a high severity issue, explains why it matters and suggests a fallback, such as replacing the clause with an independent development carve-out.

What an NDA can legitimately restrict

A well drafted NDA can do a lot without crossing the line.

• Limit use of confidential information to the stated purpose, including using it to compete or to solicit the discloser's customers.
• Prohibit disclosure, require reasonable security and prohibit reverse engineering of software or samples.
• Protect trade secrets for as long as they qualify, under state law and the DTSA.
• Require return or destruction of materials and certification.
• Add a narrow employee non-solicit, for example 12 months and only for people met through the deal, where state law allows it.
• In M&A and investor deals, add a standstill and a no-contact clause, which restrict deal conduct rather than employment.

For a full tour of each provision, see our article on NDA clauses explained.

Practical guidance for employers and deal teams

1. Keep the NDA about information. Use a separate agreement for any non-compete and only where it is legal and justified.
2. Review your templates state by state, starting with California and any state where you hire remotely.
3. Include protected activity language and the DTSA notice in every agreement with an individual.
4. Read counterparty NDAs for competition and IP language, not only the confidentiality sections.
5. Lock approved wording so business teams cannot add restrictive clauses on their own. In NonDisclosures, team templates can lock protected clauses and require approval when someone changes them.

If you want a confidentiality agreement that protects information without restricting later work, generate one now. Choose the agreement type, term and governing state, and add only the optional covenants you need, starting from the NDA template generator or the NDA template page.

This article is general information about US practice, not legal advice. NonDisclosures is a software tool, not a law firm. Laws differ by state, so have a licensed attorney review agreements that matter.