Non-Competes: Starting Off on the Wrong Foot with a Few Exceptions

by | Nov 4, 2020 | Company Culture, Leadership

Among technology startups, non-compete agreements are a staple.

Without them, sales professionals might more easily take their book of business to a rival for a better salary. The same goes for technologists, who are privy to a company’s intellectual property.

These are “grip and rip” scenarios, which point to the value of such agreements. Someone is trying to do harm to your business. You need protections.

This is different from someone who is simply trying to get paid what they are worth. Companies should never be able to imprison an employee so that they must stay with them.

Given my philosophy on this, recent research out of the Robert H. Smith School of Business at The University of Maryland recently caught my attention. There, four research papers are set to be published in top journals, co-authored by management professor Evan Starr, who addressed the debate over whether non-compete agreements help or hurt employees. Professor Star’s conclusion: Non-competes stifle workers.

In “Non-Compete Agreements in the U.S. Labor Force” in the Journal of Law and Economics, Starr presents the most sweeping work in what represents the first systematic investigation of non-competes in the United States. In it, he studies a nationally representative sample, looking at all sorts of workers.

One of the key findings: Non-competes are found even among low-wage workers.

“There have been anecdotes of that fact, but this is the first systematic evidence,” Starr says. “This is shocking, because when you think about non-competes, you think about tech workers and executives—you’re not thinking about doggie-daycare sitters or hairstylists or yoga instructors, but that’s the modal worker that’s bound by a non-compete. Our paper launches from that fact, and the key question for policymakers is whether this a good or a bad thing.”

Starr concludes they are bad, which I agree with, except in specific circumstances.

“The argument for why they are bad is pretty clear,” Starr says. “Take the case of the low-wage worker, earning $12 an hour, who gets a better offer at a competitor to make $15 an hour. A non-compete could prevent them from making those sorts of moves that are going to enhance their social and economic mobility.”

Collectively, Starr’s papers show that workers do better without non-compete agreements. The same can be said for companies.

Firms may be less profitable if they have to pay workers more, according to Starr. But there is definitely a benefit for them, too. Without so many non-competes, firms have better access to the labor pool and can hire the workers they want to hire, including those from a competitor.

Small businesses are built on trust. While in some cases, for some positions, non-competes may be necessary, we need to move away from the idea that they are standard practice.

“It’s not really a firm versus worker issue,” Starr says. “It could be a win for both workers and firms.”