Most States Still Enforce Noncompete Agreements—And It's Stifling Innovation

There’s a growing national movement against noncompete agreements. Jay Inslee, governor of Washington and 2020 presidential candidate, signed a law in May barring noncompetes for anyone who makes less than $100,000 annually, and in June, Maryland banned them for low-wage workers. Additional states, including New Hampshire and Vermont, are considering bills that would significantly weaken these contracts, and the momentum even extends to Capitol Hill, where three senators recently introduced a bill that would ban noncompetes nationwide.

Unfortunately, noncompete agreements are still pervasive. About 30 million U.S. workers, or roughly one in five, are bound by them, according to the U.S. Treasury. And as the salary scale climbs, so does the percentage of those who have signed one. Noncompetes cover about 14% of workers making less than $40,000 and nearly 50% of those making more than $150,000, says a 2019 report from the Economic Innovation Institute. Only California, North Dakota, and Oklahoma forbid enforcing them altogether, and in nearly half of the states, these agreements can prevent even laid-off employees from working in their industry for a year or more.

In Massachusetts, where I’ve been a longtime entrepreneur in the enterprise technology infrastructure industry, Governor Charlie Baker signed a law last year that weakened noncompete agreements. But reforming noncompetes is not enough—these agreements should be eliminated altogether. Noncompetes harm employees, damage the companies who require them, and stifle innovation.

Innovation thrives in a culture of achievement, when people are free to be bold and creative. Noncompetes, on the other hand, create a culture of risk aversion where people may make career decisions based on fear. For example, candidates might not take a job offer due to concerns about signing a noncompete, or employees may not even apply for other positions, because they worry their current employer could file suit against them.

Moreover, employees restrained by these agreements can’t leave to join a startup or create their own company in their area of expertise. In fact, according to the Economic Innovation Institute, in states where noncompetes are enforced, startups are less successful, and employees earn lower wages than in states (like California) where they aren’t enforced.

Today’s employees are highly mobile. Baby boomers, under the age of 48, held nearly 12 different jobs, according to the Bureau of Labor Statistics, and Gallup found that more than one-fifth of Millennials changed jobs just in the last year. Noncompete agreements threaten to lock people into a single company, which can drive talent away, and make it harder to hire the people it needs. When Michigan reversed its ban on noncompetes in 1985, a 2014 study found that the state subsequently suffered a “brain drain” of knowledge workers to states that didn’t enforce them.

While employers use noncompetes for a variety of reasons—to safeguard trade secrets, protect customer relationships, and retain key employees—in truth, there are already separate laws safeguarding intellectual property and customer relationships. Employers, for instance, can have employees sign nondisclosure agreements to protect IP and trade secrets, while nonsolicitation agreements can prevent former employees from poaching customers. A noncompete is simply unnecessary—it doesn’t provide extra protection, it just hampers an employee’s ability to maintain a competitive edge in their field.

As for retaining key employees through noncompetes, those employers who stymie employee mobility with these contracts demonstrate an unwillingness to change with the times. Reduced mobility for workers doesn’t just shrink workers’ job prospects; it also reduces an employer’s potential talent pool. And even when noncompetes are modified or weakened, companies that retain them show that they doubt their ability to retain or compete for talent on a level playing field. That’s not a corporate culture that will fare well in today’s highly competitive job market.

More fundamentally, noncompetes obstruct fairness. Employees should have the right to find work that’s fulfilling and affords them the greatest opportunity to achieve. There’s no good reason to prevent someone from earning a living by using their industry-specific skills and experience. This is even more apparent in sectors outside of technology, where noncompetes can put people out of work for a year or more, even if they are let go without cause.

Ultimately, there are better ways to retain a company’s workforce—such as providing a good work-life balance, strong mentorship programs, career counseling, and opportunities for professional development—without resorting to contracts that both demotivate employees and limit an organization’s ability to innovate.

Ellen Rubin is CEO and co-founder of ClearSky Data.