Employers use non-compete clauses to make sure their employees don’t take advantage of specialized knowledge in the future. It makes good business sense, right? That point is up for debate.
Many experts believe using non-competes appropriately can protect your company’s bottom line, writes Julie Cook Ramirez for Human Resource Executive Online. “They can make firms more comfortable sharing their trade secrets with employees that, in turn, can boost employees’ productivity and wages,” she writes, quoting Karen Dynan, assistant secretary for economic policy at the U.S. Department of Treasury. “In addition, because non-compete agreements make workers more reluctant to leave a firm, employers may be willing to invest in training for their workers.”
However, a recent report from the Office of Economic Policy at the U.S. Department of the Treasury “raises concerns about the prevalence of non-competes, which it says negatively impact worker welfare, job mobility, business dynamics and economic growth.” According to the report, 18 percent of all U.S. workers — roughly 30 million people — are covered by non-competes.
And not all of those are executives or those with high salaries, Ramirez writes: “Fourteen percent of employees earning less than $40,000 per year are bound by non-competes, while 15 percent of workers without a four-year college degree say they’ve been required to sign such agreements.”
Nellie Akalp, writing for Mashable, suggests employers make sure non-competes are specific. “A non-compete that is too broad in nature will likely be thrown out in court,” she writes. “Don’t ask your employees to sign away their rights to work in an entire industry, in any state, for 10 years. That won’t fly.”
Akalp also advises employees to watch the duration, location, specific competitors named, and conditions of departure in a non-compete. The more specific the agreement, the less likely it will hurt employees’ income or careers in the future. “If you’re asked to sign a nondisclosure or other trade secret agreement, be sure to read it carefully and keep a copy for future reference,” Akalp advises employees. “Little things you’d never consider proprietary may be deemed a ‘trade secret’ by your employer, and the courts could agree.”
Courts that hear lawsuits related to non-competes “generally frown on non-compete agreements that aren’t aimed at protecting proprietary information like intellectual property, formulas, trade secrets or business strategies,” writes Aruna Viswanatha for The Wall Street Journal. So, having employees sign one because you don’t want them to quit won’t hold up.
But often, the courts are also looking for indications that your company intends to enforce a non-compete. For example, former Jimmy John’s Gourmet Sandwiches employees sued over that company’s non-compete. “Last year, a federal judge ruled they lacked standing to bring a case because the company wasn’t planning to enforce the agreements,” Viswanatha writes.
So if your company uses, or is considering using non-compete agreements, make sure you thoroughly consider all of the factors involved to avoid doing more harm than good.