Jun 9, 2014
The New York Times reports on the rise in the use of non-compete clauses:
Noncompete clauses are now appearing in far-ranging fields beyond the worlds of technology, sales and corporations with tightly held secrets, where the curbs have traditionally been used. From event planners to chefs to investment fund managers to yoga instructors, employees are increasingly required to sign agreements that prohibit them from working for a company’s rivals.
There are plenty of other examples of these restrictions popping up in new job categories: One Massachusetts man whose job largely involved spraying pesticides on lawns had to sign a two-year noncompete agreement. A textbook editor was required to sign a six-month pact.
A Boston University graduate was asked to sign a one-year noncompete pledge for an entry-level social media job at a marketing firm, while a college junior who took a summer internship at an electronics firm agreed to a yearlong ban.
Alex Tabarrok thinks non-competes harm innovation and are bad for business generally:
Silicon Valley could not operate if non-compete agreements were enforced. Silicon Valley is a hyper-mobile workforce. Moreover, it’s precisely in the circulation of workers that Silicon Valley has one of its advantages the diffusion of new ideas. The key to Silicon Valley and much innovation today is the diffusion, the combination, the integration of different sorts of knowledge and worker mobility has been a big part of this. Not just worker mobility between firms in Silicon Valley but also immigrants, circulation between different countries, university-firm partnerships and so forth.
Firms who come to Silicon Valley know that they cannot use NCA to protect their innovations but they come anyway because the opportunity to learn from other people exceeds the costs of other people learning from you. Thus, worker mobility and the inability to protect IP by restricting mobility is bad for an individual firm but good for the industry as a whole, good for innovation, good for workers and good for consumers.
On Amir and Orly Lobel point to another drawback:
New research suggests another reason to think twice about imposing such restrictions: In a large-scale experiment, we found that subjects in simulated noncompete conditions showed significantly less motivation and got worse results on effort-based tasks. Why? We believe that limits on future employment not only dim workers’ external prospects but also decrease their perceived ownership of their jobs, sapping their desire to exert themselves and develop their skills. The resulting drop in performance may be more damaging to companies than the actual loss of the employees would be.
Of course, today’s labour market is increasingly mobile. Hence the insistence by companies to protect their recruited talent, especially when IP is involved. Tim Fernholz worries that we may be losing sight of the employee’s rights:
And what’s worse is that in many cases, non-compete agreements aren’t part of employment negotiations. Surveys by the Institute of Electrical and Electronics Engineers found that only three in 10 employees were told about a non-compete agreement when being offered a job; the rest said they learned about after they had accepted the job and turned down other offers, or even on the first day of work. Only one in 10 looked at the agreement with an attorney, either because of time pressure or because the company refused to negotiate the agreement. And this is a survey of skilled workers.
These views all hail from the U.S. In Canada, restrictive covenants such as the non-compete are permissible, provided the clause is “reasonable and unambiguous” (See Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 S.C.R. 157) So, the geographic scope, time limit and restricted activities all have to be reasonable. In other words, employers have to tailor their non-competes very carefully. But first, it’s worth considering whether there is any value in them at all.