Study: This is how much non-compete clauses hurts employees

Blinded by enthusiasm for our new jobs, too many of us do not look too closely at the language within our employment contracts. Fewer than 10% of new employees will try to negotiate their noncompete clauses, according to the U.S. Department of Treasury. But buyer beware: those seemingly innocuous paragraphs can have an outsized impact on our careers.

Noncompete clauses, or agreements to delay working for a competing company, can follow us long after we’ve left a job, limiting our options to find work in our cities and reducing our salaries for years.

New research: Noncompetes lead to lower wages

Traditionally, getting a new job at a competing firm or being recruited by an old coworker is one of the quickest paths toward a higher salary. But when you’re under a noncompete, this path can be closed to you.

Noncompete enforcement varies across states, with Florida having the among the strictest enforcement and California having some of the lowest enforcement rates. Analyzing U.S. Census Bureau data from 30 states, new research published in the Academy of Management 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.

That’s right, one job you took on a whim can haunt you for the rest of your employment history. Tech workers working in strict noncompete states earned about 4.4% less than their unbound peers over the first seven years.

The ‘lock-in’ effect

Researchers called the consequences of noncompetes a “lock-in” effect: a binding trap where employees are prevented from earning a competitive wage or working where they prefer.

These noncompetes can also cause a brain drain for the states that uphold them. Workers under strict noncompete clauses were more likely to take their skills across state lines to find work, researchers found.

The bottom line

This research paints a cautionary tale for workers. Although noncompetes have been shown to protect trade secrets for employers, they can derail an employee’s career, reducing their bargaining power and sacrificing their right to walk away.

Before you sign the dotted line of your contract, make sure to double check what exactly you’re agreeing to do and for how long.