Non-Compete Clauses – How to Loosen the Shackles

iStock_000000227687XSmallBy Nneka Orji

“Putting you in handcuffs”; so reads the Forbes 2010 article title about non-compete clauses in employment contracts. This negative portrayal of non-competes is not unique. A Harvard Business Review blog titled “Non-compete clauses punish the wrong party” is just as damning, and a recent poll by the Boston Globe has shown that 70% of the Massachusetts respondents want non-competes banned across the state.

Despite seeming unpopularity of non-competes, its use is on the rise. According to Steve Greenhouse of The New York Times, there has been an increase over the past few years in a number of industries – not just the traditional technology and manufacturing industries where the clauses have been used as a means of protecting intellectual property. Greenhouse writes that a recent M.I.T Sloan School of Management study found “that half of the nation’s engineers had signed non-competes, with a third lasting more than a year, and some more than two years.”

With the use of this contractual clause on the rise, it is important we understand how to deal with them. Are they really handcuffs, or could employees manage them in such a way that they are seen more positively?

Non-competes – the cases for and against

For: If we put ourselves in the shoes of organisation executives, it is easy to understand why non-competes could be seen as essential to maintaining competitive advantage. When executives make significant investments in technology or other forms of IP for their organisations, the last thing they want to do is to lose it by employees leaving to join competitors. Or is it?

Against: Some studies have shown that businesses which allow more movement, in terms of information flow and job mobility, benefit from more open and attractive workforces. It makes sense to try to retain trade secrets but opponents (including venture capitalists) of non-competes argue that the clause is not the only way to retain IP and it could be damaging – stifling innovation in industries. They argue that banning, or at least restricting, the use of non-competes would be more beneficial to the individual and the economy. Currently some clauses are so vague that they prevent employees from working within the same industry for a significant period of time.

Dealing with the reality of a non-compete
Signing an employment contract with a non-compete that traps you and restricts your future career options would be destructive, so here are three steps to follow when presented with a non-compete clause.

Understand the detail
When presented with your contract, engage an employment lawyer to review the clause in detail. The approach to non-competes varies across US states. For example, its use in California and North Dakota is banned and is currently being debated in Massachusetts. In contrast, non-competes are legal in New York but the “rule of reasonableness” allows employees to present their case as to why their employment with a competitor might not damaging to their former employer.

There are also different forms of the clause so your approach might vary accordingly. Is it non-solicitation (preventing the solicitation of clients), no hire no rating (preventing the poaching of recruitment colleagues), confidential information (preventing the dissemination of IP) or a combination of all three?

Be clear on what is included in terms such as “competitor” and “industry” so you ensure you do not limit your future options. They might seem obvious but better to be sure before you fin

Negotiate hard
As with all contractual clauses, non-compete clauses can be negotiated. This is a particularly important point for women who, studies have shown, are less likely to negotiate than their male peers. It is more cost effective to negotiate upfront than to deal with the legal fees and repercussions of breaching the clause.

Maintain your networks after you leave
If you do decide to terminate your contract and engage in a new employment contract with a competitor, maintain relationships with your former colleagues. The more important thing to focus on when it comes to non-competes, is the approach you take when you decide to leave the organisation. It’s important not to burn bridges with former employees; keep networking and continue to build trust.

Your employer needs to understand that your career change is not part of an intricate plan to steal IP, however employees fail to communicate this. By maintaining your networks and being clear about what falls under the “rule of reasonableness”, your motives for joining your competitor will be clearer – reducing the possibility of a drawn out legal battle focused on your breaching a non-compete clause.

And finally for employers, invest in your people so they want to stay
This is a simple and often shared piece of advice. The enforcement of non-compete clauses, due to breaching of the clause, is most likely to come from disgruntled employees who purposefully disseminate IP with competitor employers. If employees feel valued and can develop their careers at the company, offers from competitors will be less tempting.

Of course the reality is that you can retain some good people, but there will always be mobility across the workforce. Organisations can protect themselves through means other than non-competes which tend to leave a bad taste amongst employees. For example, if non-solicitation is key to the firm’s success, institutionalising clients by developing a framework for client relationship management can help. Rather than have just one employee managing one client relationship, structuring the team in such a way that multiple employees own relationships with a client could reduce the risk of solicitation if the employee leaves.

Non-compete clauses are not the end of the world. While they can feel like handcuffs, employers and employees can be managed them effectively so at least the shackles are loosened.