A “noncompete” clause in an employment contract prohibits working in the same field as the contracting employer for a period of up to two years. These clauses were first introduced in high-end jobs to protect employer business secrets, but have been spreading rapidly to the wider job market.
There are multiple aspects to noncompete clauses:
- People who sign these contracts are left with fewer employment options, particularly specialists who have no other realistic job choices.
- The conditions of the contracts, particularly in the US, may mean that people can’t even apply for jobs over the term of the contract.
- Under US unemployment law, if a person quits a job, they also don’t qualify for unemployment insurance, meaning that income support is also not available.
- The contractors have been enforcing their noncompete clauses, using lawyers to follow up on breaches of contract.
- In theory, contracted people can’t even work for themselves in the same fields. (This is a very tricky legal issue.)
Different states in the US have different policies for noncompete contracts. California banned them, and Californian politicians have been citing Silicon Valley’s vast population of experts as innovators and business creators as an example. The highly mobile Silicon Valley workforce typically works across multiple employers in the same fields, generates a lot of startup companies, and effectively cross-pollinates by not having a noncompete work environment.
Opponents of noncompete contracts have said that the contracts stifle innovation and reduce job mobility. Proponents say that the contracts are a defence against competitors.
To put the pro-noncompete argument in a balanced context- A lot of US employees have been taking business information with them when they change jobs, particularly during the 2008 financial crisis. This information is a major job-hunting asset, for some.
Another issue, also not resolved, is the “headhunting” talent-scouting employment sector, which hires experts and takes them away from employers. This practice is typically focused on the higher end of the executive and expert employee spectrum.
Issues for jobseekers
The problem for jobseekers is that the noncompete contracts impose direct costs and limitations on them. Not working for a year or two isn’t a realistic option for many people. The choice, in fact, is a term of employment followed by a guaranteed term of unemployment.
This even applies to interns, creating a gap in employment at entry level stage. Noncompete clauses have also been spreading to mainstream jobs. Bizarrely, a man employed to spray pesticides on lawns in Massachusetts had to sign a two year noncompete contract. You can see why people are worried about the idea of noncompete contracts as a standard practice. Currently, about 50% of America's engineers are under these contracts.
The legal position
At law, these contracts may have multiple potential downsides for employers. While contracts may or may not be onerous to individuals, the obvious reality is:
- Employees may have no choice but to breach their contracts, creating a major enforcement cost.
- Contracts may be invalidated by case law during the enforcement process. If so, employers automatically lose money, lose the value of the protection the contracts were supposed to provide, and risk further legal action from any contracted parties on the same basis.
These aren’t great outcomes. Invalidated contracts would be an unmitigated disaster for employers, and potentially catastrophic in cases of high-end employees.
The other problem is that these contracts may simply fail to deliver the protection they’re supposed to provide. Employees aren’t the only source of business intelligence. Business secrets may be obtained simply by buying a product or service or researching IP documentation and related information.
A better legal option for employers may be a tweaked version of the standard non-disclosure contract, defining proprietary business rights as part of the non-disclosure terms. This is a more selective, easier to administer, process, and would only need to be applied to specific contracts, rather than a blanket all-coverage approach.
For employees, however, the message is clear- Be careful what you sign.