Side Businesses and Non-Compete Clauses: What You Can Do

The desire to build something of your own, even while holding a full-time job, is a powerful driver of innovation. Starting a side business or "side hustle" can be a fulfilling way to explore a passion, develop new skills, and create an additional income stream. However, many employees find their entrepreneurial ambitions blocked by a common legal document: the non-compete clause. These clauses, often buried in employment agreements, can create a confusing and intimidating barrier.

But a non-compete clause does not always mean the end of your entrepreneurial dream. Understanding what these agreements are, how they are enforced, and what your rights are is the first step toward navigating this complex legal landscape.

This post will explore the challenges of starting a side business while under a non-compete agreement. We will cover the enforceability of these clauses, common exceptions, and provide actionable strategies to help you pursue your goals without jeopardizing your current employment.

What is a Non-Compete Clause?

A non-compete clause, or non-compete agreement (NCA), is a contract where an employee agrees not to work for a competitor or start a competing business for a certain period after leaving their job. The stated purpose is to protect the employer's legitimate business interests, such as trade secrets, confidential information, and client relationships.

While they primarily apply to your actions after you leave a company, they are often written broadly enough to restrict your activities—including side businesses—during your employment. These clauses can feel restrictive, but they are not always legally airtight. Courts and state legislatures have placed significant limits on their power.

Are Non-Compete Clauses Even Enforceable?

The enforceability of a non-compete agreement depends heavily on state law and the specific terms of the contract. Courts are often skeptical of these clauses because they can limit a person's ability to earn a living. For a non-compete to be considered valid and enforceable, it must generally be reasonable in three key areas:

1. Geographic Scope

An enforceable non-compete must be limited to a reasonable geographic area. A clause that prevents you from working in a specific city or region where the company does business might be upheld. However, a clause that prohibits you from working anywhere in the country, or even the world, is almost always considered unreasonable and unenforceable.

2. Time Duration

The time restriction must be fair. A non-compete that lasts for six months to a year after employment is often seen as reasonable. A restriction that lasts for five or ten years, on the other hand, would likely be struck down by a court as an unfair restraint on trade.

3. Scope of Activity

This is the most critical factor for a potential side business. The agreement can only restrict you from engaging in activities that are directly competitive with your employer's business. A vaguely worded clause that forbids "any business activity" is unlikely to hold up. For example, if you are a software developer for a healthcare tech company, a non-compete cannot legally stop you from starting a side business that sells handmade furniture online. The two businesses are completely unrelated.

It's important to note that some states have taken a firm stance against non-competes. California, Oklahoma, and North Dakota, for instance, have banned nearly all non-compete agreements for employees. Other states have passed laws prohibiting them for low-wage workers. The legal ground is constantly shifting, so understanding your state's specific laws is crucial.

The Duty of Loyalty: An Unwritten Rule

Even without a formal non-compete, all employees owe their employer a "duty of loyalty." This is a legal principle that requires you to act in your employer's best interest while you are employed by them.

Starting a side business can potentially violate this duty if:

You work on your side business during company time.

You use company resources (laptops, software, printers) for your side hustle.

You solicit your employer's clients for your own business.

Your side business directly competes with your employer.

Violating the duty of loyalty can be grounds for termination, even if you don't have a non-compete clause. Always maintain a clear separation between your day job and your side business.

Strategies for Pursuing Your Side Business

If you have a non-compete and an idea for a side hustle, don't give up. A thoughtful and strategic approach can help you navigate the restrictions and protect yourself legally.

1. Analyze Your Agreement and Your Business Idea

First, carefully read your employment agreement. Does it actually contain a non-compete clause? If so, what exactly does it say? Pay close attention to the definition of "competing business."

Next, honestly assess your side business idea. Is it in the same industry as your employer? Does it target the same customers? Could it in any way be seen as competitive? If your side hustle is in a completely different field, you are likely on safe ground. The more overlap there is, the more caution you need to exercise.

2. Maintain a Clean Separation

This is non-negotiable. Your side business must be entirely separate from your day job.

Time: Only work on your side business on your own time—nights, weekends, and lunch breaks (off-site).

Equipment: Use your personal computer, personal phone, and personal email address for all side business activities.

Funding: Never use a company credit card or expense account for your side business.

Confidentiality: Be extremely careful not to use any of your employer's confidential information, client lists, or trade secrets. This is often a separate and more serious legal issue than violating a non-compete.

3. Seek Permission and Transparency

While it may seem counterintuitive, one of the safest approaches is to be transparent with your employer. If you are confident your side business does not compete, consider discussing it with your manager or HR department.

You can frame it as a professional development opportunity or a personal hobby. Many employers are supportive of their employees' entrepreneurial ventures, provided they don't create a conflict of interest. Getting written permission is the ultimate protection. An email from your manager or HR representative approving your side business can serve as powerful evidence if your right to operate it is ever challenged.

4. Consult with an Employment Lawyer

When in doubt, get professional legal advice. An employment lawyer can review your non-compete agreement, explain the relevant state laws, and assess the risk of your proposed side business. The cost of a legal consultation is a small investment compared to the potential cost of a lawsuit or losing your job. A lawyer can help you understand the real-world risks and may even help you negotiate a waiver or clarification from your employer.

Final Thoughts

A non-compete clause can seem like a roadblock to your entrepreneurial aspirations, but it is often more of a speed bump. These agreements are not all-powerful, and the law provides significant protections for an individual's right to pursue business opportunities. The key is to be informed, cautious, and strategic.

By thoroughly understanding your agreement, ensuring your side business is truly non-competitive, and maintaining a strict separation from your employer's resources, you can build your venture on a solid legal foundation. Don't let legal jargon intimidate you. With the right knowledge and approach, you can successfully balance your day job with your entrepreneurial passion.