A non-compete, short for a non-compete agreement, is a contract between you and your employer that, after leaving your job, you won’t work for a competitor for a certain period. Lawyers, security people, and sandwich makers have signed these agreements, though I am most familiar with non-competes in my own industry, finance. I have a non-compete as a software engineer at a high-frequency trading firm.
Purported raison d’etre
Proponents of non-competes say they are necessary for protecting confidential or proprietary information. The argument goes that some firms have critical secrets (trading algorithms, manufacturing methods, recipes for sodas.) Firms obtain these secrets at great R&D expense, hoping they will increase the company’s profits. If employees could join competitors too soon after quitting, competitors would learn secrets without having to invest their own money. Perhaps firms would spend less and less on research, opting instead to hire knowledgeable employees from competitors. Progress would stagnate.
Are they really necessary?
I personally don’t find this argument very convincing.
Is it true that without strict non-competes, companies would be unable to protect secrets? Actually, intellectual property is protected by law in all 50 states by copyrights, patents, and trade-secret laws. These mechanisms protect secrets without limiting job mobility.
Furthermore, it’s possible to protect IP without taking competitors to court at all. All profitable firms are profitable because they have a competitive advantage, and in a knowledge economy, the competitive advantage is partially from the knowledge of their workers. Google, for example, has a competitive advantage in search engines partly because of its secret algorithms. Profitable firms that don’t have non-competes manage to preserve their competitive edge by simply paying their workers enough that they don’t leave. The average tenure at Google is between 1 and 3 years, but it has retained a monopoly in search for two decades while (mainly) avoiding non-competes.
Non-competes are ripe for abuse by the employer because they alone decide what counts as a competitor and what counts as a trade secret. Non-competes are frequently used even when there are no secrets to protect. For example, one employee in the high-frequency trading industry sought to accept a job helping low-income workers with their resumes and interview skills. Her hedge fund employer prevented her from taking this job because they said the resume editing company was a competitor. Because legal fees would be so expensive, she was effectively left with no recourse.
I’ve left out one aspect of non-competes up til now. Non-competes lengths are stipulated as “maximums.” A typical agreement says, “You will not work for competitors for up to 18 months after leaving.” The actual length of the NC might be 0 months, 18 months, or anywhere in between. So how is this actual length determined?
Officially, on your last day of work, HR would review the projects I had worked on, and depending on how secret these projects are, HR would choose a length, up to 18 months, of NC. In reality, things work differently. From what I’ve observed, the four most significant factors that determine the length of your non-compete are:
- How popular you are at your firm (Wei is a nice guy but burned out. Give him the entire length so he can recharge.) This is non-compete as compensation for friends.
- Where you want to work next (George is leaving and going to RivalFirm. We want to hire Jack from RivalFirm, who has a long non-compete. Give George the full length. That way, we can work out an agreement with RivalFirm to reduce George’s non-compete if RivalFirm reduces Jack’s. ***) This is non-compete as negotiating power.
- How prestigious your manager wants to seem (My employee is leaving. Tell HR to give him the entire length. Otherwise, my boss won’t think the team I manage does important work.) This is non-compete as empire-building.
- Whether you are still needed on the team (Jessica handed in her resignation, but we need all the help we can get right now. Tell her that if she quits, we will enforce a 24-month non-compete, but if she works for another 12 months, we will only enforce 12 months.) This is non-compete as a deterrent to quitting.
Protecting secrets, the purported reason non-competes exist, is not on the list.
** When joining the firm, I signed a non-compete of 12 months. Four weeks into the job, my employer told me I would need to sign a new, 24-month, non-compete or I would be fired. I signed.
*** Yes, this really is the way it works (at my company, at least).