Do Small Businesses Really Need a Non-Compete Clause?not really genetic markers

OhOnce upon a time, a business would hire an employee and have them sign an employment agreement that included a “non-compete” clause — a pro-business protection that does one thing: prohibit an employee from working for a competitor.

But in an era when employers are vying for talent, workers have the upper hand, and the tide is turning. Joe Biden, for example, doesn’t like non-compete clauses.

In 2021, he issued an executive order aimed at reducing the use of non-compete agreements, which limit worker mobility and make it harder for workers to change jobs or seek better working conditions. The order is not law, but it directs the FTC to investigate and possibly penalize companies that use such agreements because they are deemed anticompetitive.

It is unusual for the federal government to take such a defiant stance on this matter. In the past, non-compete regulations were enacted by states themselves. California has banned non-compete clauses since 1872. But, seeing the omens in Washington, many other states are taking action.

In 2021, Nevada repealed the use of non-compete clauses for low-wage workers. Oregon prohibits non-compete enforcement if the non-compete is deemed too “broad.” Maryland and Virginia recently restricted non-compete for low-wage workers. North Dakota and Oklahoma prohibit any type of non-compete clause, except in very limited circumstances. Washington, D.C. enacted a watered-down rule just last year. Employers in Alabama and Louisiana can only enter into non-compete agreements with existing employees.

Tech companies like Microsoft have now stopped using non-compete clauses. Big tech companies competing for talent hate employees jumping ship to competitors and bringing their secrets with them.

There is still some way to go. According to one analysis, between 27.8% and 46.5% of private-sector workers in the US are still subject to them, but the days of non-compete appear to be coming to an end. At least for most workers.

Is this a problem for small businesses? Not really. Most non-compete clauses, at least for the vast majority of my clients, are useless. Overzealous lawyers have written this paragraph into employment agreements, but I’ve never seen a clause like this enforced, and I’ve been involved in some acrimonious separations between key employees and companies. There are many threats. But it dies there.

reason? Pursuing non-compete violations is a costly, time-consuming, distracting and disruptive endeavor. It’s really not worth the hassle as it’s almost always the employee who is liable (not their subsequent employer unless a very smart lawyer is involved, and even then there will be fights) so even if the former company wins, the payoff is forever Not worth the effort. Plus, it’s bad PR and doesn’t reflect well on how the company and its owners relate to the outside community and current employees. Why is that big bad company going after that poor little worker?

Besides, who cares? No matter how “important” or “critical” an employee is, how much damage will he do if he works for your competitor? Are you that scared? Are you not protecting your intellectual property? Don’t you have another employee to fill the vacancy? If that employee is so important to your small business, aren’t you doing everything you can to keep them happy working for your company?

I realize that in some cases, key employees can hurt their former employer by leaving for a competitor. But rarely have I found an employee with that ability or knowledge. Then again, I work in Philadelphia not Silicon Valley, and I work mostly in small companies, so my perspective may be too limited. But I don’t think so.

So should we do away with non-compete clauses and agreements altogether? Do not. These types of restrictions do work, at least for some companies of a certain size that have very senior people doing very confidential things. But it does make sense to strictly limit their use to a very limited group. Otherwise, I say let workers go where they want.

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