According to an M.I.T. professor’s survey, more than one-half of U.S. tech sector employees are required to sign employee noncompete agreements. These contracts are often overlooked in the rush to obtain and begin a new job. They can harm a career, however, in unexpected ways.
The same M.I.T. study found that one-third of U.S. engineers left their chosen industry after changing jobs, presumably because of the negative effect on their job prospects of their noncompete agreements. Enforcement of noncompete agreements might even reduce the job opportunities that are available for engineers, and other employees, in the states that enforce them. A recent Federal Reserve Bank staff analysis indicated that “industry clusters” with high employment growth were more likely to develop in states like California, which prohibit the enforcement of employee noncompetes, than in states that enforce them. Engineers and entrepreneurs move to Silicon Valley for reasons other than good weather.
The possible negative effects of noncompete agreements on employee mobility and prosperity have caused legislators in Massachusetts, Virginia and Minnesota to introduce legislation to prohibit their enforcement. If an employee wants to join a different company in the same industry, or to start their own company, what can they do to minimize any harm to them from a noncompete agreement?
Before leaving their existing employer, an employee should determine whether or not he or she is bound by a noncompete agreement with it. Noncompete agreements are often not separate contracts. They are often only a paragraph in a larger employee contract. They might be located in an employee handbook. Government employees should familiarize themselves with the rules of the Ethics in Government laws that limit how soon they can contact their previous agency after they leave employment. These laws limit the information that former government employees can provide to new private employers.
An employee should first ask a prospective employer if it requires them to enter a noncompete agreement. The M.I.T. study found that seventy percent of surveyed employees were told that they were bound by a noncompete agreement only after accepting a new job. Fifty percent of those surveyed were told of their noncompete agreement only after starting a new job.
Most states allow employee noncompete agreements, because employers argue that they are necessary to protect their trade secrets and their investment in employee training. If an employer requires a noncompete, a prospective employee should suggest that trade secret enforcement serves the same purpose without limiting the pool of future happy company “alumni”.
If a prospective employer still insists on a noncompete agreement, an employee should try to negotiate three points in the agreement. Noncompetes go against the general public policy in favor of business competition. In states that enforce them, courts require that they be reasonable in the scope of the type of work covered, reasonable in their geographic scope, and reasonable in their time period. Rather than depending on a judge to find an agreement to be unreasonable after the fact, an employee should try to shape a reasonable agreement before taking a new job.
First, an employee should ask that a noncompete be limited to the same kind of work that was done for that employer, defined as narrowly as possible. Second, they should ask that a noncompete not extend into a geographic area where the employer has no existing competition. (A nationwide prohibition is unenforceable, because California will not recognize or enforce it.) Third, an employee should ask that a noncompete not continue for more than six months after they leave the company. Valuable knowledge from a former employer dissipates quickly. The longer the period of a noncompete extends, the harder it is to justify.
Employees should seek legal advice on their individual circumstances, because contract law varies among states. For more general information, see my online presentation: “5 Things To Do Before You Start A New Job”, my website: www.charleshmartin.com, and my book: Every1’s Guide to Electronic Contracts.