W2 Issues/Concerns


Check out our weekly blog posts and see the latest news and discussions happening in the HR world of business.

In the News: Could a non-compete hurt your business?

Many employers ask that workers sign non-compete contracts as a condition of employment. On the one hand, these agreements can help keep proprietary information, as well as the talent that came up with the good ideas, out of the hands of your competition.

But there is a down-side to the non-compete. According to the Harvard Business Review, “a growing body of evidence shows that innovation, productivity, and economic growth are all greater in regions where local laws don’t allow (or authorities don’t enforce) such contracts.” The best example? Silicon Valley, which is widely revered for spewing out good ideas.

Further, a new, large-scale experiment found that subjects in simulated non-compete conditions showed significantly less motivation and got worse results on effort-based tasks. The Harvard Business Review speculates that the limits on future employment dim workers’ external prospects and also decrease their perceived ownership of their jobs. Therefore, workers have less “desire to exert themselves and develop their skills,” which the business review suggests results in a “drop in performance [that] may be more damaging to companies than the actual loss of the employees would be.”

For the experiment, the Business Review recruited 1,028 participants to complete an online task for pay; tasks were either effort-based or creativity-based. Some subjects in each group were told that although they would later be invited to perform another paid task, they’d be barred from accepting the same type of task (mimicking a non-compete) while other subjects were given no such restriction.

Data from the study showed that 61 percent of the subjects in the noncompete group gave up on their task (thus forgoing payment), compared with only 41 percent in the control group. Further, among the subjects who completed the effort-based task, people with noncompete conditions were twice as likely to make mistakes as people in the control group and those who were restricted also skipped more items and spent less time on the task, a finding that the business review says is indicative of low motivation.

However, participants who completed the creative task performed similarly in terms of errors, skipped items and time spent, regardless of any restrictions. The business review noted that this isn’t really all that surprising as “prior research had shown that in creative endeavors, people are primarily driven by intrinsic motivations.”

In conclusion, the fine folks over at Harvard note that depending on the type of work you are asking of your employees, it might not always be wise to require a non-compete agreement, noting that “if the walls meant to protect human capital diminish the quality of that capital, they may not be worth building.”

Would you forgo non-competes in your business? Let us know in the comments.

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