Getting a job at a prestigious company like Microsoft would normally be a cause for someone to celebrate, but when Lindsay-Rae McIntyre did just that in 2018, IBM sued her. McIntyre had worked at IBM before jumping ship to Microsoft. An outsider may look at this and wonder what IBM’s problem was, but it all came down to one thing. McIntyre had signed a non-compete agreement while under IBM, and by going to work for a competitor, they claimed she was in violation of her contract.
A statement from an IBM spokesperson laid out the case: “IBM intends to fully enforce Lindsay-Rae’s non-compete agreement—just like we do with all of our senior leaders—to protect our competitive information.” And IBM isn’t alone in this line of thinking, even in the tech industry. Amazon and Microsoft have launched similar lawsuits in the past, while there are scores of others that never make the headlines. Clearly, companies take non-compete agreements seriously.
Non-compete agreements have come under fire in recent years, but they can still crop up from time to time. If you’re looking for a new job, it’s possible that you’ll come across a non-compete clause in your next contract. Before going any further, you’ll need to understand what they are.
In this article, learn what a non-compete agreement is, where you’re likely to find one, the potential benefits it provides, the controversy surrounding it, and helpful alternatives.
What is a Non-Compete Agreement?
A non-compete agreement (NCA) is a contractual agreement between an employee and their employer restricting the employee’s ability to work for a competitor if they ever leave their current job. The aim of a non-compete agreement is to prevent employees from revealing trade secrets, confidential information, or client relationships to a competing company after they’ve left.
Non-compete agreements generally last for a specified period of time after employment ends such as six months to two years. Many such agreements are also usually limited to a specific geographic area. For example, an agreement may specify the employee cannot work for a competitor within a 25-mile radius of the employer’s location. With many companies utilizing remote work positions now, the issue of geography has grown more complicated. Non-compete agreements also tend to specify that an employee cannot work in a particular industry or field.
A software engineer may sign a non-compete that bars her from working at another software company in the financial technology sector for 18 months after leaving her employer. Or a television news producer may agree to not work for a competing television station within the same market for a calendar year.
Where Non-Compete Agreements Are Common
Non-competes are usually found in fields like technology, sales, and healthcare. There are industries where employees have access to highly valuable trade secrets, intellectual property, and relationships with sought-after clients. Companies tend to want to protect these assets from falling into the hands of competitors.
The numbers can vary across industries. One study published in the Journal of Human Resources found that about 45 percent of physicians had signed non-compete agreements. Other researchers discovered a similar number (43 percent) of engineers were subject to a non-compete agreement. In comparison, only around 17 percent of all workers in the U.S. had agreed to a non-compete clause in their employment contracts.
By defining the limitations around time, geography, and industry, non-competes aim to balance the employer’s interests with the employee’s ability to pursue the kind of job they want. While relatively common, these agreements remain highly controversial with benefits and drawbacks all prospective employees and employers should know.
The Purpose and Benefits of Non-Competes
Companies don’t just get employees to sign a non-compete agreement on a whim. They have several strategic reasons for pursuing this tactic. The following are some of the most common ones.
Protect Trade Secrets and IP
Perhaps the most cited reason for an NCA, these agreements help prevent confidential information, intellectual property, and trade secrets from ending up with a competitor. This includes sensitive information like formulas, manufacturing techniques, source code, customer lists, and roadmaps for future products. The more sensitive the information, the longer an NCA will usually last.
A pizza sauce recipe may be a closely guarded trade secret at Domino’s. To work there, a chef may have to sign a non-compete agreement preventing them from later taking the secret recipe to Pizza Hut or Papa John’s.
Discourage Poaching of Talent
Non-competes also warn direct competitors not to poach each others’ top talent. This promotes more ethical competition and long-term employment within an industry. It should be noted that sometimes a company wants to hire a specific individual so much, they are willing to pay any fines or legal obligations that come from breaking an NCA.
Apple may hesitate to recruit a senior engineer away from Google if that person is bound by a non-compete agreement.
Incentivize Investment in Training
With a non-compete in place, companies are more willing to invest substantial resources in training and developing their employees. From their point of view, there’s less risk that the employee will take their newly-gained skills directly to a competitor.
An employer may pay for an executive to complete an Ivy League MBA program if a non-compete is in place.
The Controversy Around Non-Compete Agreements
Companies argue that non-competes are necessary to protect their business interests and promote growth across an industry. However, these agreements have become increasingly controversial in recent years. Critics suggest they go too far in restricting talent mobility and limiting workers’ options. Here are just some of the points critics mention when arguing against NCAs.
Strict non-competes may be anti-competitive, effectively creating monopolies or oligopolies in some industries. If top talent is restricted from going to competitors, it can limit healthy competition no matter the field. This may result in less innovation and higher prices for consumers overall.
Limit Talent Mobility
Non-competes reduce employees’ career options and ability to market their skills to multiple companies. Changing jobs is one of the primary ways that an individual can increase pay and advance their careers over time. That means getting locked into a contract that costs employees salary growth and development in crucial skills.
Varying State Laws
The enforceability of NCAs varies dramatically depending on the state. In California, for example, non-competes will be fully against the law starting in 2024. However, many other states like Arizona and Indiana do not prohibit them. Additionally, the Federal Trade Commission (FTC) has proposed a non-compete ban in most instances across the country, creating further uncertainty. This patchwork of laws across the country leads to more confusion for both employers and employees.
Should You Sign a Non-Compete Agreement?
If you’ve been offered a job, you’re likely excited at the prospect of starting with a new employer. However, in the case where you have to sign a contract with a non-compete clause, you may feel a bit conflicted. Before you put your name on the dotted line, here are some items you should consider.
Examine the Scope
Review the restrictions within the agreement around the time period, geographic area, and industry limitations. A 6-month agreement within 10 miles, for example, is generally more reasonable than a 3-year nationwide restriction. If you feel the restrictions are still too harsh, try to negotiate a narrower scope if possible.
Consult a legal professional to understand the enforceability of non-competes in your particular state. If you live in California, for example, the agreement may not be enforceable at all. If you know your rights, you’ll be able to defend yourself.
Negotiate for Consideration
Most states require employers to provide “consideration”—something of value—in exchange for signing a non-compete. This could be a pay raise, special training, stock options, or other benefits. If faced with a non-compete clause, take consideration into account, and prepare to negotiate.
Weigh the Pros and Cons
Think carefully about the advantages and disadvantages for your career that come from signing a non-compete agreement. A short-term non-compete may be acceptable to gain access to valuable trade secrets that will boost your skills. But an overbroad agreement could limit your options down the road, often unnecessarily so.
Alternatives to Non-Compete Agreements
Given the downsides and potential legal complications of non-competes, some companies are exploring alternative ways to protect their legitimate business interests without restricting employee mobility. Companies would be wise to consider options beyond restrictive contract clauses to appeal to today’s in-demand talent. Here are some of the alternative options to non-compete agreements.
Non-Disclosure Agreements (NDAs)
NDAs allow employees to work for the competition, but they prohibit sharing of confidential information like trade secrets, intellectual property, and other sensitive information. This allows talent to look elsewhere for a job while protecting vital data.
These agreements restrict employees from directly soliciting or recruiting clients and staff away from their previous employer. However, they do usually allow an employee to work directly for a competitor.
Continued Vesting of Stock Options
Companies can structure compensation packages to vest stock options over a period of 2 to 4 years after the employee has left the organization. This gives an added incentive for the employee to not compete directly against the business in the short term.
Open Ideas Policies
Some tech companies have adopted what are called “open ideas” policies. These allow employees to reuse concepts and strategies from their previous roles. As a result, there’s less concern over sharing trade secrets when talent moves to another company.
Negotiating is Part of the Game
Non-compete agreements remain a complex and controversial facet of the employment landscape. While companies argue they are necessary to protect their business interests, critics suggest they are anti-competitive and limit individual opportunity.
As with any job offer, employees should carefully consider what a non-compete is and how it will affect them. Be open to negotiating the different points of an NCA. Companies are aware negotiations can happen and will usually engage in them if possible.
Another point open to negotiation is salary. Just because an employer offers you a position at a certain salary doesn’t mean you have to take it off the bat. With the right knowledge, you can begin a discussion to net yourself an even higher salary. Learn the tips on how to do this by reading the following article.
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