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Noncompetes Are Not Only Bad For Employees–They’re Bad For Companies Too

Organizations are handicapping themselves when they force new hires to sign noncompete agreements.

Noncompetes Are Not Only Bad For Employees–They’re Bad For Companies Too
[Photo: fill via Pixabay]

Late last week BuzzFeed News reported that the site NowThisNews requires that all of its new employees sign noncompete agreements, which stipulate that employees can not work for competitors for as long as two years after their employment at NowThis. The noncompete even spells out the forbidden companies, including Vox, BuzzFeed, Vice, CNN, and adds a clause that more could be added to the list whenever NowThis saw fit.

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The rationale for noncompetes seems obvious–it’s a tactic to keep talent from taking industry knowledge to the competition after a company has invested in them. They have been common among executive-level employees for years, but have been trending down to entry-level employees recently. These contracts, however, may actually do more harm than good–both for the person signing away their future employment opportunities as well as the industry in which they work.

First, it’s important to understand why these agreements exist in the first place. The most common reason a new team member may sign a noncompete is because the company is working on something proprietary that is valuable to others organizations. It’s also used to retain top high-paid talent so they don’t get poached. High-ranking employees who are privy to intellectual property could theoretically hurt a company’s competitiveness if they jump ship and go to another, similar place.

The problem with the NowThis controversy is that these employees’ roles don’t involve that sort of proprietary information. They are news curators and writers whose skills transcend the job they have at the moment. Not only that, but BuzzFeed writes that noncompetes were given to “low-level staffers.” Thus, the move seems particularly unfair–especially for entry-level employees who are trying to begin their career.

Mark Muro, a senior fellow at the Brookings Institute and policy director of its Metropolitan Policy Program, adds that this is a slowly emerging and unfair trend. “I think in recent years [noncompete use] has expanded way too widely,” he says. “It’s hard to tell what’s being protected.” He points to the sandwich chain Jimmy John’s, which up until last year had its employees sign noncompetes. So a minimum-wage sandwich maker at Jimmy John’s was unable to go work at a Subway for up to two years after leaving.

Muro, however, believes that this practice isn’t just bad for the new employee. By keeping talent relegated to specific companies, innovation is stifled. He points to California and Silicon Valley, which has a more “free flowing, less regimented approach” to noncompete practices. He says this is absolutely one of the reasons the West Coast is considered the leader in innovation and technology, “way out in front of the East Coast tech scene.”

Beyond the general point that noncompetes may stifle innovation, they could end up hindering an organization’s future. In the case of NowThis, if a young burgeoning reporter wants to begin a flourishing career, they will likely not go to a place that forces such a practice. “It might not be worth signing up if it’s going to constrain your ability to jump around,” says Muro. By having new employees sign this form, potential talent will likely choose to go elsewhere. “It would ultimately be a problem for recruitment,” he says.

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Some critics have brought up the fact that often these agreements are never enforced. For instance, in the media industry, the millennial-focused news site Mic has reportedly also had employees sign a similar document (albeit without specific competitors named). Many former Mic employees have left for other organizations, and none of have been sued. But even if it ends up just being a scare tactic, it’s still a legal contract. “It’s not a completely empty letter,” says Muro. “If it’s just for pretend then let’s not have it.” He adds that countless other employees in dozens of other industries have seen this sort of contract enforced.

In the end, noncompetes are not only bad for the workers signing away their rights, but also have negative ramifications for companies and industries too. The only thing such a practice does is frighten new hires.

For Muro, the most important thing is innovation. “Industries and regions do better where there is an open flow of information,” he says. “The freer it is to circulate, the more free and innovative an economy is.”

About the author

Cale is a Brooklyn-based reporter. He writes about business, technology, leadership, and anything else that piques his interest.

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