The U.S. Federal Trade Commission (FTC) effectively tried to kill noncompete agreements last week. While some companies plan to challenge this, it was the right decision to make.
California — where I’ve spent most of my life — along with Minnesota, Oklahoma, and North Dakota, have already banned noncompetes. In California, this resulted not only in higher wages but also in the creation of Silicon Valley and provided a significant barrier to other states that didn’t have this ban regarding enticing employees to move.
This national ban should result in more employees moving to states with lower living costs, increasing salaries and benefits, and providing much better work environments. It will also result in stronger companies, even though many who fear their employees may leave will fight this.
Let’s talk about noncompete agreements this week, and we’ll close with my Product of the Week: a performance electric car that is an absolute bargain used.
The Argument in Favor of Noncompetes Is Largely False
Companies often argue that noncompetes are critical to protecting their intellectual property in case departing employees take their proprietary knowledge to another company. But if they do that, the former employer is afforded substantial protection. If an investigation finds that technology did migrate with the employee, the old employer gets ownership rights over the products created using their technology.
This kind of “theft” is surprisingly easy to prove. Patents, copyrights, and other protections over that intellectual property are in place, making technology theft, regardless of the method, excessively risky and expensive.
As a result, someone in a critical position changing companies without a noncompete is put in an administrative position for around a year to ensure they don’t accidentally compromise the projects they are working on.
The real reason for noncompete agreements is to prevent employees from shopping for jobs to get higher pay or better benefits. The noncompete effectively locks them into their company unless they choose to switch careers or relocate to a state that prevents enforcement — which was and still is a frequent practice to circumvent noncompetes.
This strategy enables companies to keep pay and benefits low for existing employees while increasing pay and benefits to attract external candidates, often resulting in huge salary and benefits differences between older and new hires.
Consequently, the company doesn’t have to be competitive with existing employees since the noncompete effectively locks them into the company, and new hires will eventually find themselves in the same underpaid position as their older peers.
The Problem With Noncompetes
Whenever you lock employees into a job, you risk them realizing you are taking advantage of them and revolting.
Revolt behavior could include theft of company assets, illicitly selling company secrets, union organizing (unions are not fans of noncompetes), lower morale, and reduced productivity. People who feel they are being taken advantage of but can’t afford to leave tend not to be top performers and may look for ways to reduce their contributions.
This scenario is not only bad for the employee, who may eventually get fired for deficient performance, but it’s also bad for the company because it effectively creates a hostile work environment where the employer is actively working against the employee’s best interests.
Thanks to California’s effective ban on noncompetes, I was able to leave my old company when they made decisions that I disagreed with, form my own company, and take my most valuable clients with me. Had a noncompete bound me, I’d have had to sit out a year, been unable to take my clients with me, and failed as an independent analyst.
The lack of an enforceable noncompete gave me the freedom to protect and grow my career, find an independent path, and become more successful and happier than I otherwise would have been.
Noncompetes Are Employee Abuse
Changing companies is often the quickest way to advance your career and increase your income. However, if you stay at a company, especially one that enforces noncompete agreements, you might find that salary increases do not keep pace with the cost of living, even if you are a top performer.
The presence of a noncompete agreement discourages employees from seeking better opportunities or higher pay unless they are terminated. Being fired might free you from the noncompete, but it also tarnishes your employment record, which companies tend to disclose during background checks.
This situation exemplifies how companies use their superior bargaining power and larger financial reserves to disadvantage their employees, effectively reducing their real compensation over time. As inflation increases, the purchasing power of employees’ incomes decreases as the cost of goods and services rises.
Microsoft’s Good Example
In 2022, Microsoft announced that in the U.S., only partners and executives would be subject to noncompetes, sparing its lower-level employees from the restriction.
This policy isn’t abusive because executives are usually wealthy and can afford workarounds, such as taking jobs in a California company like Google, which will keep them financially whole. Plenty of Microsoft executives have moved to Google over the years, resulting in products like Android on smartphones, a segment in which Microsoft failed.
In Microsoft’s case, the policy isn’t abusive so much as ill-advised because that supposed protection has resulted in a number of surprise critical departures over the years. It reflects bad governance in a company typically held up (for good reason) as one of the best-run technology companies in the world.
Prince Parfait