Starting a Business While Employed (State Laws, Ethics)

Patrick Ward Patrick Ward Follow May 01, 2021 · 10 mins read
Starting a Business While Employed (State Laws, Ethics)

Ethics and legality can get tricky, especially in business. The former is about doing the right thing, the latter about doing what is required.

A person wanting to start their own business while still employed — aka a ‘hybrid entrepreneur’ — will need to give due attention to both legal and ethical considerations about whether they can — or should — do so.

This article will delve into some of those ethical and legal issues that any aspirant hybrid entrepreneur may have to consider. In most cases, there is no issue with starting a business during or shortly after a full-time employment contract. However, depending on the state or country you reside in, there may be complications if you don’t consider the regulatory and ethical considerations up-front.

Disclaimer

I am not a legal or financial advisor. Information shared on this page is for general information purposes, and is not intended to construed as legal or financial advice. You should always consult a legal professional when making decisions about your company.

There is a decent chance when you were hired that you were obliged to sign one or more employment-related agreements either before or just after commencing work with a company. A few examples of these could include:

  1. Non-disclosure agreement (NDA), aka confidentiality agreement: you may not divulge a company’s confidential info;
  2. Invention assignment agreement: you agree that any potential inventions you conceived during employment belong to your employer.
  3. Non-solicitation agreement: you may not solicit and/or accept business from your employer’s customers.
  4. Forfeiture agreement: you forfeit benefits when you leave your employment;
  5. Antipiracy agreement: you agree not to solicit and/or hire the employer’s employees should you leave.

Your employment contract may also have included one or more of the following clauses:

  • Non-compete clause (NCC): you are not allowed to seek employment within certain contexts once you leave, usually to do with your given industry, a specified amount of time and/or geographic area;
  • Garden-leave clause: you are compensated during the period that you are restricted as per your NCC;
  • Agreements as clauses: the agreements outlined above may appear as clauses within your employment contract rather than as standalone agreements.

Note: the above list of what are collectively known as restrictive covenants isn’t exhaustive.

This article will focus on NCCs as they are the clauses most likely to also stipulate or infer that starting up a business or registering an LLC while still employed with the company is prohibited.

Known as a restraint of trade in many other jurisdictions, the non-compete clause is probably the most contentious restrictive covenant in the US, with critics of NCCs believing they can, “impede employee mobility, stifle competition, and prevent people from starting new businesses.” That is why we’ll return to NCCs shortly in greater detail.

Are Employer Non-Compete Clauses Enforceable Regardless of What State I’m In?

Non-compete clauses are common, but that doesn’t mean they’re always enforceable. What state you signed your Non-Compete Clause (NCC) in can have a large impact on the viability of your side-hustle business.

Currently, California is generally known as the state that is most hostile to NCCs, with Californian courts often even refusing to recognize NCCs signed in other states. In fact, commentators have noted that the backlash by Californian courts occurred in large part due to the surge of NCCs being used by tech companies during the dot com boom to prevent their employees from moving to rival companies or being poached.

However, there is currently another state that is even more anti-NCC, and which may surprise you. The table below shows 20 selected US states and their approaches to NCCs, including the 10 states with the largest economies, all ranked from most to least progressive regarding NCCs.

StatePolicy on non-compete clausesDescription of state policy
North DakotaProhibited.This state became the first to prohibit any forms of NCC, as per North Dakota Century Code,§ 9-08-06.
HawaiiProhibited (but only for the high-tech industry)This peculiar exception to NCCs as per the state's Act 158, effective July 1 2015.
CaliforniaGenerally not allowed.Courts are notoriously anti-NCC; 3 strictly limited exceptions not related to normal tech functions.
ColoradoGenerally not allowed.4 strictly limited exceptions not related to normal tech functions.
OregonSeverely restricted"The employee must be: an executive, administrative or professional employee exempt from the overtime requirements AND have access to trade secrets or competitively sensitive information."
New YorkQuite restricted (and prohibited in the broadcast industry)Generally anti-NCC, with 4 criteria sometimes considered: legitimate business interest / ability of employee to earn a living / geographic and/or time constraints / not against public interest/free trade.
VirginiaSomewhat restrictedNCC only strictly allowed if prevents employee being a direct competitor. Legitimate business interest only in context of time, duration and geographic area or reach.
WashingtonSomewhat restrictedNCC only enforceable if: employee earns $100,000+ per year / disclosed before or during contract negotiations or consideration given / employee compensated during period and not longer than 18 months.
MassachusettsSomewhat allowed.3 criteria must be met: 10 days before start of employment / extra consideration provided / 12-month maximum.
MarylandAllowed4 criteria are considered: legitimate business interest / not undue hardship on employee / reasonable geographic/time limits / not against public interest.
IllinoisAllowed.3 criteria considered: not too injurious to employee / legitimate business interest / not against public interest.
New JerseyAllowed.3 criteria considered: not too injurious to employee / legitimate business interest / not against public interest.
OhioAllowed.3 criteria considered: no undue hardship to employee / legitimate business interest / not injurious to the public.
ArizonaAllowed.3 criteria considered: more consideration offered / legitimate business interest / not too broad
MichiganAllowed.3 criteria are considered: duration of the NCC / geographic extent or reach / type of employment or line of business
PennsylvaniaAllowed.2 criteria are considered: legitimate business interest / geographic extent or reach.
TexasAllowed.2 criteria are considered: not a greater restraint than needed / limitations on geographic extent/time
FloridaOften allowed.Considered quite 'pro-NCC': (vague) condition that the NCC should not be 'too broad' / not normally for more than 2 yrs
GeorgiaQuite easily allowed'Backdoor' enhancement of NCCs due to much stricter NDA rules and no time limits on non-trade secret confidential information.

Which states have the most flexible laws for employee side-hustles?

California, Hawaii, North Dakota, and Colorado have the most flexible laws when it comes to employee side hustles, with strong state protections for employees working in the same industry after leaving a job. Outside certain industries (namely some STEM verticals) employer non-competes are either prohibited or not enforceable in these states.

Florida and Georgia are the worst states for employee side hustles, and place few or no limits on employer non-competes. Georgia is the only state to make no time requirements on non-compete periods, meaning employers can effectively bar their employees from an industry in the state. Florida is only slightly better on this front, with limits placed at two years.

Can I Legally Start a Business or Register an LLC While Employed Full-Time?

There is absolutely no US law or regulation, either federal or at the state level, that expressly prohibits any employee from starting up their own business while they’re employed. Similarly, there are no complete prohibitions on starting or registering a business after working for a particular company.

That means you can register a limited liability company (LLC) even while employed, the ownership of which is very open in most states. For example, there is usually no maximum number of members in an LLC, meaning that you can even register as a ‘single-member’ LLC, or SMLLC.

That’s the good news.

The bad news, however, is you can do so unless it is expressly stated that you are prohibited do so in your employment contract which you signed.

What I mean by this is: there may not be a law stopping you from starting a company during your employment, but similarly there is no law stopping your employer from requiring a legal contract which makes you legally liable if you break the contract terms… which can include starting a business on the side, even informally as a 1099 consultant.

However, as with most things legal there is a further caveat: remember, there are no express laws about the issue in the US. Therefore, it’s a common law matter, which means it’s up to state courts to interpret the validity of restrictive covenants such as NCCs.

If you’ve watched the show Silicon Valley, you’ve seen an example of how this can play out. And while this show is a comedy, the lawsuit described is honestly not that far off from cases I’ve seen working on the agency side:

When it comes to NCCs, the consensus among professionals I’ve consulted with is that courts usually only allow NCCs under certain conditions:

  • That it is needed to protect the employer’s business interests;
  • That it is for a reasonable period of time (usually a max of 2 years);
  • That it is restricted geographically; and/or
  • That it doesn’t defy the public interest, for example, limit competition.

Ethical Considerations of Starting a Business While Employed

Should I Tell My Boss?

Best advice? Yes, telling your boss is your best bet. It’s also the most ethical thing to do - remember, ethics is about doing the right thing, and can sometimes be downright difficult! Ethics is not the thing that you are legally or contractually obliged to do but what your conscience tells you to do.

Throw in your better judgement - itself fluid and all about context - and you can then decide whether or not to tell your boss your start-up plans.

Once again: you are not legally obliged in any state in the US to tell your boss your plans unless your employment contract or other agreement to which you signed stipulates otherwise. As for those pesky non-compete clauses, a lot will depend on what state you signed everything in. However, you may feel better or more relieved divulging your plans to them.

Here are 4 of the most important ethics-related issues you need to be mindful of when considering your start-up when still an employee:

  1. Company time: Don’t let your start-up impact your work and productivity - it will be justifiable cause for you to get terminated and is unethical.
  2. Company resources: Just don’t use them for your start-up - as in ever! It’s not only unethical, it’s an enormous legal liability.
  3. Clients: however tempting or even justified you might think it may be, it will probably not be a good idea to try and steal existing clients - it will be justifiable grounds for termination and no court in the land will condone it. It’s also unethical.
  4. Poaching colleagues and ‘business kharma’: in business what goes around, comes around, so it’s a good idea not to poach colleagues, however tempting it might be to have them join you.

Ultimately, for most employees it will likely be a balancing act between doing the right thing and complying with the law. Potter Stewart, a former Justice of the US Supreme Court once said: “Ethics is knowing the difference between what you have a right to do and what is right to do.”

Any person in the the tech world, or any industry for that matter, would do well to remember those words when considering starting a business while still gainfully employed.


Frequently Asked Questions

Is it legal to start a business while employed full-time in the US?

Starting a business while employed in the US is legal in all states unless an employee is contractually barred from doing so, usually in the form of a non-compete clause (NCC) or like provision. Even so, courts in the US generally impose strict criteria regarding enforceability of NCCs. It also depends significantly on which state the contract was signed in.

Is it legal to start a business while employed full-time in the UK?

Starting a business while employed is legal throughout the UK. What is known as a restraint of trade is not legislated in the UK, and these clauses are generally unenforceable in English common law. A restraint of trade clause is only enforceable if it is “no more than is necessary to protect the legitimate interests of the party relying upon it.”

Is it legal to start a business while employed full-time in Singapore?

There is no legislation to prohibit employees starting their own businesses in Singapore, although common law can uphold the right of an employer to restrict an employee. As such, contracts with restraint of trade clauses are often enforced by Singaporean courts.

Is it legal to start a business while employed full-time in Canada?

Canada doesn’t have legislation that prohibits an employee from starting their own company during or after employment. However, Canadian courts will enforce contractually-agreed limitations, albeit tightly-restricted. The 2020 case of Pineault et Groupe Marketing International Inc is insightful: a labor tribunal found that an employer had unlawfully terminated an employee who publicly announced on Facebook that she intended to start her own business after her parental leave.

Patrick Ward
Written by Patrick Ward Follow
Hi, I'm Patrick. I made this site to share my expertise on team augmentation, nearshore development, and remote work.
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