Noncompete agreements should cost companies something

Photo: stevepb via Pixabay

In Massachusetts, companies can enforce noncompete agreements to stop their workers from working for (or starting) a competitor. There ought to be a cost for companies to do that — and if the Massachusetts legislature passes the law it’s considering, there will be.

Noncompetes in Mass. make it hard to change jobs

As it stands now, many Massachusetts companies — especially tech companies — require new employees to sign noncompete agreements with a term of a year or more. As a result, employees stay with their employers longer, rather than taking a better job with a competitor. Noncompetes remain in force even if the company fires or lays off the employee, limiting job prospects even for formerly loyal workers.

Non-competes have no force in California. The startup culture in California thrives because of this. While both Silicon Valley and Boston have premiere universities churning out talent and tech powerhouses where they get experience, there are a lot more vibrant startups in Silicon Valley. (There are lots of other factors, from the weather to the availability of financing, but Bostonians’ inability to leave a big company and launch a competing startup makes a big difference.)

Any company that regularly distributes stock options or restricted stock can basically change the terms of the noncompete at will. To get the options or stock, the company requires you to sign an updated agreement. Option compensation is a significant benefit, but it comes with a cost to your career flexibility.

The proposed Mass. law changes noncompete policy

According to an article by John Chesto in today’s Boston Globe, the legislature is considering changes to the law.

Previous attempts to change the law and invalidate noncompetes failed, because the large tech companies in Massachusetts lobbied successfully to block them. But the new proposed law is a compromise.

Noncompetes had gotten out of hand. Companies were using them to block the movement of low-level hourly workers. The proposed law prevents this. It also limits the term of noncompetes to one year, because longer noncompetes basically make leaving or losing your job a crippling blow for anyone who specializes in a specific area, like email marketing or speech recognition software. A worker with specialized skills may only have two or three companies that might value those skills — but with a multi-year noncompete, they end up prevented from working for these companies.

Adding a cost to noncompetes

Massachusetts companies put noncompetes in place because they can. It costs them nothing.

But the new bill proposes that a company must pay a worker half of their salary during the period of the noncompete. This will have the effect of (1) cushioning the financial blow for workers who must leave and (2) making companies think twice about the length of their noncompete clauses.

The companies hate this. According to the Globe article:

“That was unexpected, and I think would be a problem for us,” said the Greater Boston Chamber of Commerce’s chief executive, Jim Rooney. “It creates a dynamic in which an employer would have to basically pay someone for not working. . . . This doesn’t feel right.”

My response is this: it doesn’t “feel right” that a company can fire a worker and then prevent them from making a living at what they do best, at no cost to the company.

Chris Geehern, an executive vice president at Associated Industries of Massachusetts, says that employees who sign noncompetes are typically paid more when they sign up: “In essence, they’re already being compensated for that noncompete period.” This is bullshit. When all the companies in Massachusetts have noncompetes, they pay the same competitive salaries. The presence of a noncompete changes nothing.

When workers take a job, the noncompete shows up on the first day. If you want the job, you sign the deal. On the day you take the job, you are not imagining that you will leave. On the day you leave — voluntarily or not — then you worry. But at that point, it’s too late to do anything (unless you’ve banked a year’s salary and want to take a year off doing something completely different, or doing nothing).

I understand why companies want to prevent people from jumping ship or taking their innovations to competitors. If they want to stop that from happening for a year, that’s fine. But they should have to pay for it.

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  1. Personally, I think that it is a form of indentured slavery. However, the fact that companies do this stunts a person’s ability to grow! It is a form of punishment to make them unemployed, underemployed. The sky rocketing cost of shelter, food, water and transportation warrents viable consideration.
    You are part of the problem or you are part of the solution!

  2. High pay for non-compete in Idaho hovers slight above minimum wage. We should feel lucky to be making $8 an hour… right? When political candidates and executive vice presidents stop lying to us, the U.S. will be something other than a country. Well be great again. 😉

  3. Over here in Europe there is a European law that gives European citizens the right to work in any EU country.

    This EU law has the nice side-effect that it renders noncompetes technically unenforceable.

    Sure, companies can still write noncompetes into their contracts of employment. But they cannot contract out of the law. The law gives you the right to work. Trying to remove that right by contract is not legally enforceable.

    Josh – In the US are noncompetes enforceable across state borders?

    1. They are enforceable based on the state of residence. Since it takes a year to establish residence in a new state, you can’t just leave the state and declare yourself immune. The effect is the same . . . you have to wait a year to be free, after you leave a state in which noncompetes are legal.

      1. “When workers take a job, the noncompete shows up on the first day. If you want the job, you sign the deal.”

        That’s also the best time to negotiate if the company wants you. It doesn’t always work, but it’s worth a try at the management and executive levels.

        Noncompetes for hourly or low-level workers should be just plain illegal.