LEGAL ISSUES

The Business Case Against Asking Employees to Sign a Non-Compete Agreement

Non-compete agreements may be on the rise, but they're not the best way to protect your business--for many reasons.
Advertisement

You'd think most entrepreneurs would be against noncompetitive practices, as they are themselves frequently the Davids going up against some form of Goliath. But you'd be wrong.

An increasing number of business owners are writing non-compete agreements into employment contracts, or have sued former employees for breach of noncompete agreements. Plus, the behvior is infiltrating fields where such suits would have been unthinkable a decade ago (Think, camp counselors and hairdressers), as the New York Times reported Monday.

And that's not good, ultimately for you or the economy, research indicates. Noncompete law suits jumped about sixty pecent in 2012.

These noncompete agreements are increasing as the recovery motors on, and more workers return to employer rolls or start their own companies. Plenty of research indicates that restrictive employment covenants destroy innovation and the resilience of the economy by sapping employees of the desire to create and innovate.

"Mobility gives power to the employee, and this maximizes creativity and success, and gives that to the employer," says Andrew K. Jacobson, president and lead attorney for employment law firm Bay Oak Law, in Oakland, California.

Noncompete agreements are subject to a patchwork of different state laws. While most states allow them, California has outright banned such covenants for 80 years. Legal experts point to Silicon Valley as their shining example of how an economy benefits from higher mobility of employees and fewer barriers to competition. (Large firms still find a way around the states legal statutes: Last month, engineers at some of the big high tech firms such as Google and Intuit settled a class action suit for $325 million when it was discovered that employers had fixed salaries.)

Other states, such as Massachusetts, are going through convulsions over their noncompete laws, and have significant popular movements afoot to rewrite state laws to be more like California's.

Here's the takeaway: Asking employees to sign noncompetes may be bad for your busines and the economy in general. It hijacks employees' potential, and likely sticks them on the sidelines during vital working years, during which time their skills get rusty and stale. The only time you should wind up in court is when trade secrets vital to your comapny are at stake. And there are typically other statutes that protect intellectual property, and which can be used in those instances, Jacobson says. 

Besides, says Alan Hyde, professor of law at Rutgers University and author of Working in Silicon Valley: Economic and Legal Analysis of a High-Velocity Labor Market: "Most noncompetes [for] camp counselors and hairdressers are unenforceable. Those employers can't demonstrate any legitimate public interest in restricting competition."

So spend your time on building your business, not on litigation, which is costly and time consuming and squanders intellectual and financial resources. 

"We want people to fill new positions, because this allows maximum flexibility and it creates a dynamic economy and it helps with innovation," Jacobson says. 

IMAGE: Gallery Stock
Last updated: Jun 9, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: