advertisement
advertisement

Are Employee Non-Competes Obsolete?

These once-ubiquitous agreements may be hurting both companies and employees more than they’re helping. Here’s what works instead.

Are Employee Non-Competes Obsolete?
[Group of business people: Pressmaster via Shutterstock]

Thomas Erickson had never really given much thought to employee non-compete agreements.

advertisement
advertisement

But recently, the CEO of the Burlington, Massachusetts-based software company Acquia, Inc., says he’s been getting some push-back from new hires who weren’t happy signing contracts that restrict them from working for competitors or within the same industry after they leave their jobs.

After a few conversations with his human resources department, Erickson spoke with his executive team and abolished employee non-competes at the company for all but a few senior executives. Out of Acquia’s more than 500 employees, roughly five or six are still bound by their non-compete agreements, he says.

At the same time, Massachusetts Governor Deval Patrick was challenging longstanding non-compete legislation in the state. In late July 2014, after heated debate, the Massachusetts legislature failed to pass new legislation vastly limiting these agreements. But Erickson and groups like the New England Venture Capital Association are still trying to make the case that they’re obsolete and bad for business.

“There are cases where technical teams have worked for very poorly-run companies, going the wrong direction. They build up a lifetime of expertise, but when they leave the company, they’ve been prevented from using that expertise and have to change their line of work and take salary cuts,” Erickson says.

Are Employee Noncompetes Obsolete?

While Governor Patrick’s push to ban most non-competes grabbed headlines, there isn’t exactly a national rush to get rid of them. California bans non-compete agreements, except in some very specific circumstances. A handful of states, such as Florida, Virginia, and Washington, specifically prohibit overly broad non-competes.

Related: What You Need to Know Before You Sign A NonCompete Agreement

advertisement

Attorney Nina Ries, founder of Ries Law Group, a Los Angeles, California business law firm that represents clients in the technology and other sectors maintains that non-competes can be replaced with other agreements that don’t limit an employee’s right to work. Blanket non-compete agreements are not just a nuisance–they can actually hurt the business sector by no allowing people to work in the field in which they’re most skilled, she says. In addition, they may not offer the protection the business is actually seeking.

“The non-compete itself doesn’t cover intellectual property. It just means you don’t compete,” she says.

A Better Way

Ries says business leaders shouldn’t rely on non-competes instead of seeking the protections they actually need. Non-disclosure agreements and other intellectual property (IP) protections, while sometimes harder to enforce, actually address the specific issue about which most businesses are concerned–taking ideas and information to competitors.

In addition, 47 states and the District of Columbia have also adopted the Uniform Trade Secrets Act, which prevents employees from taking companies’ intellectual property to other businesses. She says it’s a different story when you’re talking about owners or partners, however, especially when they’re selling their business. Even in California, those types of non-competes are allowed.

“You don’t want those very owners to walk away and then put up a competing business doing exactly what they just sold. That undermines the idea of what it is the acquiring company’s purchased when they bought the company,” Ries says.

Erickson is less measured with his criticism, citing the case of a colleague’s daughter who couldn’t work in the nonprofit sector after her first job because of a sweeping non-compete. That’s unfair to workers who can’t afford to fight what is likely an overly broad and unenforceable agreement. He says many businesses are “oblivious” to the specific protections they need and just use non-competes as their default protection instead of specifying the IP and non-solicitation of employees protection they really seek.

advertisement

“The folks that are lazy about that say, ‘Well I’m just going to use a non-compete because that’s very easy to take to a judge,’ whereas taking intellectual property stuff is clearly harder to a judge,” he says. “They say, “I just care about the intellectual property, but I use a non-compete to enforce it, because it can be lazier and it’s cheaper to do it.”

Ries says it also pays to be judicious in the information you share with employees. Every employee does not need to have widespread access to account lists and trade secrets.

Instead, integrate systems that give employees the information they need to do their jobs well, but not free access to every customer list or piece of intellectual property on the company’s servers.

She says that exit interviews are also a good way to get a sense of whether you have a disgruntled employee on your hands and to reinforce any non-disclosure agreements and laws that apply.

“The types of employees that are more likely to take your information or try to screw you are the types of employees who are unhappy,” she says.

advertisement

advertisement
advertisement

About the author

Gwen Moran writes about business, money and assorted other topics for leading publications and websites. She was named a Small Business Influencer Awards Top 100 Champion in 2015, 2014, and 2012 and is the co-author of The Complete Idiot's Guide to Business Plans (Alpha, 2010), and several other books

More