Noncompete Clauses: What You Should Know

Some believe they slow innovation and prevent job growth

8 July 2014

Photo: iStockphoto

Starting a new job can be exciting, but before you sign your employment contract, be sure to read the fine print of the noncompete clause, should there be one. More companies are now including this clause—which could specify what company employees are allowed to work for after they leave or even the type of business they can start. In other words, the clause prevents them from competing with their new employer.

According to a recent article in The New York Times, noncompete clauses have become common practice in the past few years. Although they’ve mostly been linked with technology companies, employers from a spectrum of industries—including hair salons and camp counselors—are now asking their new hires to sign them. Their use is so prevalent in Britain that many minimum-wage workers are trapped in what are known as “zero-hours contracts,” which often do not offer employees benefits or guarantee how many hours they will work week to week. Those who signed them cannot pursue other job opportunities.

The growing use of these legal documents has created some backlash. Massachusetts, for example, is considering banning their use, saying they slow innovation and needlessly prevent employees from moving to new jobs. An ongoing poll from The Boston Globe shows nearly 70 percent of respondents support banning them in the state.

The clauses are already illegal in California, but companies have gotten around the law by allegedly agreeing not to “poach” employees from related firms. These secret agreements resulted in an antitrust class-action suit against Adobe Systems, Apple, Google, and Intel. The lawsuit alleged that the four companies conspired together to stifle competition and suppress wages. The companies settled earlier this year for US $324 million.

Despite the recent controversy, noncompete clauses may be unnecessary. Peter Cappelli, professor of human resources at the Wharton School of the University of Pennsylvania, in Philadelphia, writes in the Harvard Business Review that it’s already illegal for one company to steal another’s intellectual property, “whether they do it by stealth or by poaching an employee.” He adds that the clause punishes the wrong person. “Noncompete agreements clearly are sanctions, not mandates, and one reason why employers impose sanctions on their employees who leave, rather than waiting to sue competitors for stealing trade secrets, is because the former is so much cheaper and easier to do.”

So what should you do if you’re asked to sign a noncompete clause? Randall S. Hansen, founder of QuintessentialCareers.com, advised that the first thing one should do is understand how the employer defines “competition.” It could mean not working in a specific geographic area, not taking a position that matches the scope of the current role, or it could be a specific time period the employee is required to stay with the company.  

As with all legal documents, each noncompete agreement is different, and thus the best advice for job seekers is to consult with a labor attorney, Hansen adds. He recommends asking whether the agreements are negotiable, especially on details such as which employers are considered competitors, the amount of time necessary to stay with the company, and whether the mandate goes into effect if the employee is terminated.  

Supporters of noncompete clauses argue that companies invest in their employees so they have a right to expect loyalty in return. Opponents say the documents stifle competition, result in unhappy workers who can't leave their jobs, and slows or stops the growth of start-ups as talented people become afraid of leaving their current jobs to pursue other opportunities.

Have you signed a noncompete clause? If so, how has it influenced the scope of your career? Do you find the practice stifles innovation and job growth, or does it help protect intellectual property? Tell us what you think in the comments section below.

Learn More