Once upon a time a business would hire an employee and make them sign an employment agreement which would include a “non-compete” clause – a pro-business protection that serves one objective: prohibiting an employee from working for a competitor.
But in a period when employers are fighting for talent, workers have the upper hand and the tide is turning. Joe Biden, for one, is not a fan of non-compete clauses.
In 2021 he issued an executive order aimed at curtailing the use of non-compete agreements because they limited worker mobility and made it harder for workers to change jobs or seek better working conditions. The order isn’t law, but it directs the Federal Trade Commission to investigate and potentially penalize companies that make use of these types of agreements when they have been deemed anti-competitive.
It’s unusual for the federal government to take such a provocative position in this matter. In the past, non-compete regulations have been left up to the states. California has banned non-compete clauses since 1872. But, seeing the writing on the wall in Washington, many other states are picking things up.
In 2021 Nevada voided the use of non-compete clauses for lower-wage employees. Oregon has made non-competes unenforceable if they’re deemed too “broad”. Maryland and Virginia recently restricted non-competes for lower-paid workers. North Dakota and Oklahoma ban any type of non-compete clauses except in very limited situations. Washington DC just enacted a watered-down rule this past year. Alabama and Louisiana employers can only use non-compete agreements with existing employees.
Tech companies like Microsoft have now discontinued the use of non-compete clauses. Big tech companies that compete with each other for talent hate it when workers switch jobs to a competitor, bringing their secrets with them.
There is still a ways to go. Between 27.8% and 46.5% of private-sector workers in the US are still bound by them, according to one analysis, but it does look like the days for non-competes are coming to an end. At least for most workers.
Is that a problem for small businesses? Not really. Most non-compete clauses, at least for the great majority of my clients, are useless. The paragraph gets thrown into employment agreements by overzealous attorneys but I’ve never, ever seen one enforced, and I’ve been party to a number of acrimonious separations between key employees and companies. There have been lots of threats. But it dies there.
The reason? Pursuing non-compete violations is a costly, time-consuming, distracting and disruptive exercise. It’s not really worth the bother because it’s almost always the employee who’s liable (and not their subsequent employer unless there’s a really smart attorney involved and even then there’s a fight) and so even if a former company prevails the payoff is never enough to be worth the effort. Plus, it’s bad PR and doesn’t reflect well on a company and its owners both with their outside community and current employees. Why is that big, bad company going after that poor little worker anyway?
And besides, who cares? Regardless of how “important” or “critical” an employee is, just how damaging will it be if that person works for your competitor? Are you that afraid? Have you not protected your intellectual property? Do you not have other employees that will fill the gap? If that employee is so important to your small business, have you not done what you could to make them happy working for your company?
I realize that there are a few instances where a key employee could really hurt a former employer by going to a competitor. But rarely have I found such an employee with that kind of power or knowledge. Then again, I work in Philly, not Silicon Valley, and I mostly work with smaller companies, so maybe my viewpoint is too limited. But I don’t think so.
So should we do away with non-compete clauses and agreements altogether? No. These types of restrictions do serve a purpose, at least for some companies of a particular size that have very senior people doing very confidential things. But it does make sense to severely restrict their use to that very limited group. Otherwise, I say let workers go where they please.
