A non-compete agreement may look harmless enough, but if you’re not careful it can cost you a lot of time and money in the long run.
Here’s an example: A college student had an internship at an ad agency. She signed a routine non-compete and was subsequently hired as a full-time employee. Two years later a former client of the agency offered her a great job. The non-compete from her internship still blocked her move.
Sometimes you hear it said that non-compete agreements are not enforceable. Don’t believe it. They usually are. Besides, even if you’d prevail in court — who wants to go to court? It would result in a Pyrrhic victory at best.
Non-compete agreements steal your future negotiating power. They typically provide no extra compensation for signing. Sometimes, they make economic sense and provide needed protection to the employer; other times they are capricious. Either way, they don’t add value to you. If presented with a non-compete agreement, here are some options you have from best to worst.
Best: Don’t sign. Even if it makes complete sense and seems harmless, there’s just no advantage to you, so don’t sign it. Delay a little by asking to have it reviewed by a lawyer. If they still come after you for it, talk with your boss and say, “The economics of the job market is this: I give you good work and value for what you pay me, and you don’t fire me; on the other hand, you pay me well enough and treat me well enough and I don’t quit. A non-compete takes away those incentives. I believe those economic principles are powerful enough to keep both of us on our toes. I’d rather not weaken that balance. What do we need to do to let this pass?”
If that doesn’t work…
Better: Negotiate compensation for it. If you’re not allowed to work for or solicit clients for one year after you terminate, then how about getting 12 month’s severance or some other compensation upfront or at the time of termination?
If that doesn’t work…
Good: Try any or all of these eight moves:
- Go over it with a lawyer and limit the scope of the agreement as much as possible. Have it apply to named companies and products. Define precisely the future companies and individuals that are off-limits and make sure everything else is fair game.
- Reduce the time parameters of the agreement.
- Get rid of any ‘would cause irreparable damage…’ phrase that leaves the consequences of violating it open-ended. Be very specific about the consequences of violating it.
- Limit effect to voluntary termination — so if they fire you, then the non-compete is not applicable.
- Have it automatically expire on the first anniversary of your hire.
- Have a violation decided by binding arbitration, not the courts.
- Have 30-day written notice provisions entered into the agreement with a grace period for remedy so it can’t be slapped on you at whim.
- Delay its initial date of effectiveness. That way you get a chance to make sure you’re going to stick with this new company lest you work one month, leave and are trapped.
If you’re absolutely, positively stuck and need a last resort…
Risky, but still OK: You can try the bureaucratic defense. That’s where you create your own “red tape.” Each step of the process will take a long time. Have your lawyer add clauses the corporate counsel must review every change in language. You can string it out as long as possible, hoping it will simply get lost in the shuffle.
And then there’s what not to do…
Not recommended: Anything sneaky or devious. You might feel like resorting to deception, but the law of karma tenders few exemptions and you’ll reap what you sow. If discovered, or even suspected, things might get worse: You might not only find the non-compete enforced, but you may be penalized for your miscreant behavior. Instead, negotiate straight up the best you can.
New research: Noncompetes lead to lower wages
A non-compete can truly hurt your earning potential even though when you get a new job the expectation is that you will get a raise.
New research published in the Academy of Management that looked at U.S. Census Bureau data from 30 states, found that tech workers in states with stronger noncompete clauses are working at an economic disadvantage to their peers in states with less restrictive noncompetes.
When you start your career in a state with strict noncompete clauses, your salary will be persistently less than your peers in less restrictive agreements for eight years, regardless of whether or not you leave the state, researchers found.
Tech workers working in strict noncompete states earned about 4.4% less than their unbound peers over the first seven years. These results are what researchers have dubbed as the “lock-in” effect. It prevents workers from ever making a competitive wage.
This can also lead to states losing talented employees because why would workers stay in a state with such strict non-compete clauses.