Editor’s note: Opinions expressed in this commentary are the author’s alone. This article is general in nature and does not constitute legal advice. Readers with legal questions should consult an attorney.
In addition to reducing risk and protecting employers, non-compete agreements can have community-wide benefits.
But recent research by organizations including the Ewing Marion Kauffman Foundation and the U.S. Department of the Treasury reveal how the prevalent use of non-compete agreements within a community can cause significant damage to a local economy and its labor force.
The purpose of this article is to help business leaders better understand the impact non-compete agreements have on the Kansas City economy and labor force and to propose alternative means by which they can protect their business interests while also promoting labor mobility.
What is a non-compete agreement?
A non-compete agreement is a restrictive covenant that prevents an employee from starting or working for a business that competes with his or her prior employer.
Most states enforce non-compete agreements to some degree, either by statute or case law, while a small number of states strictly refuse to enforce them (most notably California). If a non-compete provision is not drafted to protect a legitimate business interest, however, it may be invalidated in court. That’s why most non-compete agreements are limited in length, geographic range and by what it means to “compete.”
There are good and bad aspects of non-competes.
Non-compete agreements are clearly beneficial for employers. In addition to limiting competition, they help reduce the risk of disclosure of confidential information and trade secrets.
Beyond benefiting the employer, non-competes can benefit a community and its workforce:
- Improved work quality: Employers are more likely to invest in employee training and education when their employees are bound to non-competes.
- Increased innovation: Employers are more likely to disclose trade secrets to employees who are bound to a non-compete agreement and, in turn, those employees will be more likely to improve on those trade secrets and create meaningful innovation.
Conversely, non-compete agreements can have chilling effects on a community and its workforce:
- Damage to the economy/wages: In communities where non-competes are prevalent, labor mobility is lower, which reduces wages and harms overall economies.
- Reduced productivity: Employee productivity depends on the quality of the relationship between the employer and employee and when the employee is prevented from leaving one employer to find a better match, overall productivity is reduced.
- Loss of skills: An employee bound to a non-compete may resign and change his or her profession, allowing his or her skills to go to waste.
- Higher attrition: Employees bound to a non-compete may relocate to a state in which their non-compete agreement is unenforceable in order to find work, which harms the local economy he or she departed.
There are alternatives to non-compete agreements.
To be clear, there are situations where a non-compete agreement is the best and sometimes only way to adequately protect a business — even if it harms the local community as a whole. In some situations, however, there are alternative agreements business leaders can use to both protect their business while still promoting economic growth and labor mobility.
For example, business leaders should consider the following:
- Non-disclosure agreements: Employers should always require employees sign a NDA that prohibits the employee from disclosing the employer’s confidential information and trade secrets outside the company and from using that information for his or her own private benefit.
- Non-solicitation agreements: Employers can use non-solicitation agreements to prevent an employee from soliciting the employer’s clients and other employees after an employment relationship ends.
When used together, these agreements can serve many of the same purposes as a non-compete agreement without causing harm to a local community.
What’s best for Kansas City?
Kansas City has a lot of momentum right now. To build on this, our community should encourage business leaders to adopt policies that protect legitimate business interests while also promoting innovation, workforce training and labor mobility.
Adopting such a policy will help Kansas City solve one of its “Catch 22” problems.
Some large employers don’t want to locate here because our labor force isn’t as big as other big cities and some talented employees don’t want to work here because there are a limited number of high-quality employers. But if Kansas City business leaders embrace investing in employees without relying on non-compete agreements, our labor force will become more productive and less likely to leave our community.
Chris Brown the founder of Venture Legal, a Kansas City law firm serving the entrepreneurial community, and also b.Legal Marketing, a website development and hosting platform for small law firms. You can follow him on Twitter @CSBCounsel