In a previous blog posting, we profiled a study which found that non-compete agreements may actually decrease motivation and performance. In fact, the study led the experts at the Harvard Business Review to note that such agreements result in a “drop in performance [that] may be more damaging to companies than the actual loss of the employees would be,” thus destroying their whole purpose.
So, let’s dive a little deeper. First off, a non-compete is broadly defined as a contract that prohibits an employee from working for or otherwise providing services to a direct competitor of your business for a predetermined period of time. The non-competes are typically only enforced once the employee leaves your company either to join a different company or perhaps to just strike out on their own but within the same market. Non-competes are designed to protect companies from former employees sharing trade secrets or proprietary information about current or future products, business development strategies, marketing or sales plans, pricing formulas, clients or customers, or other operational information (think salaries, recruiting pathways, etc).
Non-competes can be a bit prickly from a legal standpoint, with many states banning them outright and others just going so far as to restrict their use to certain markets or sectors of the workforce (lower income roles in particular are often protected). However, if you are in the clear, you need to be sure that your non-complete includes:
- A date on which the agreement becomes effective
- A reason for enacting the agreement
- Specific dates during which the employee will be barred from working in a competing environment and the demographic area covered by the agreement Details as to how the noncompeting party will be compensated for agreeing to the terms
At face value, the non-compete seems like a slam-dunk. After all, it affords the employer peace of mind that none of your proprietary information or expertise is going to walk out the door with a disgruntled employee. However, data suggest that it can cause more harm than good.
From the jump, having an employee non-compete agreement may hinder your ability to attract talent to your company, especially for millennials who typically change jobs more frequently than their older peers as their career interests shift. The same can be said if you work in an industry that has a strong geographical pull, such as requiring a non-compete for a tech person working in Silicon Valley or for a stock broker based in Manhattan, as any move outside of your company would also require an entire household move!
When you tell folks that you want them to sign a non-compete, you are implicitly telling them that you do not trust them to some degree. For your existing employees this may feel like a slap in the face and may breed resentment where it never previously existed. Some employees may not welcome the shift and may opt to leave your company all together in search of an employer that will instill that trust in them.
As we mentioned earlier in this post, non-competes are a legal landmine! In many cases, they won’t stand up in court because they will be deemed overly restrictive, but even if you can uphold them, the cost of enforcement can be astronomical because you have to hire an attorney, initiate a lawsuit, and bargain on winning (or else be out the court costs for the person you are trying to sue!) On a good day, a non-compete can cost you a few thousand dollars if you choose to run it by a lawyer and do your due diligence with enforceability, but on a bad day, it can cost you your business if you run into a problem. What are the alternatives? Well, you could consider asking employees to instead sign a confidentiality clause. These agreements, which are sometimes known as non-disclosure agreements or confidential disclosure agreements, prevent employees from sharing or otherwise using proprietary information, knowledge, or material in any future business endeavors, be it their own or with another company. While it still protects your intellectual property, these agreements do not restrict an employee’s ability to move between companies or business opportunities, particularly when they have no intention of disclosing information. In addition, they are typically easier to write up, enforce, and explain to your employees as you can position it simply as protecting yourself.