What’s Wrong With Noncompete Agreements – Pretty Much Everything Whether They’re Legal Or Not

Immediately stop using noncompetes because they directly damage recruiting and your employer brand. But currently, there is an added reason to drop them. Because under recently proposed FTC guidelines, noncompete agreements that restrict employee movement will almost completely be unenforceable in the US.

Drop Them Because There Is No Evidence That They Actually Work

Despite years of use, there is no hard data showing that they actually meet their stated goals for reducing the loss of trade secrets and key customers. However, there are a large number of problems that have resulted from using them. Each is listed below.

The Top 8 Direct Problems Caused By Noncompete Agreements

Here, in chronological order, are the top 8 problems companies have encountered when using noncompetes.  Unfortunately, no companies actually track the cost of these unintended consequences.

Some Unintended Consequences To Consider 

  • They put you at a competitive disadvantage – a majority of companies don’t use them (voluntarily or because they are unenforceable). Unfortunately, using them will make your company stand out (in a bad way). Especially if you hire in California or Internationally.
  • The current limed use of noncompetes may soon become completely illegal – even under current rules and court decisions. Noncompetes can only be applied to a limed range of jobs and states. And the proposed FTC guidelines would make them almost totally unenforceable in the US. So, get ahead of the curve and begin phasing them out right away. 
  • Creating these agreements is extremely costly – it takes many hours of expensive legal work to sculpt the basic agreement for each covered job family initially. And each subsequent individual employment agreement must also be personalized using the hiring manager’s time.
  • These noncompetes will scare away top applicants and candidates – after a good deal of expensive candidate screening has already occurred. The remaining candidates will likely then learn about the required noncompete. And this will discourage the remaining top candidates. Because this practice alone will quickly reveal to candidates that the company has a controlling culture. In addition, any public enforcement of them will often lead to bad PR and damage your employer brand. Adding these agreements to existing employees is a mistake. Because that will almost certainly hasten top employee turnover.
  • The agreement alone may cause recruiters to screen out those with them prematurely – any applicant with an agreement may be automatically screened out by recruiters or hiring managers. Solely because they fear that avoiding the breaking of this agreement could make hiring this particular candidate much too problematic and complex.
  • It’s not a good way to start a good working relationship – because the company has such enormous power throughout the hiring process. Companies can essentially force finalists to agree to noncompetes. However, in some cases, the harshness of the noncompete may not fully sink in until the offer is made or during onboarding. And in any case, it should be obvious to managers that this early harsh exercise of power is not the best way to begin a relationship of mutual trust.
  • It’s hard to determine when an agreement has been broken – because you are dealing with the work done by a former employee who is now working at another company. It is extremely hard to find out and assess when there has been a violation of the agreement. And then if enforcement is warranted and if it is likely to have a positive outcome and ROI.
  • Enforcing these agreements will be extremely costly – in order to assure compliance, you must track and monitor each former employee covered by the agreement. And not only will monitoring be extremely expensive. But all subsequent follow-up enforcement actions will require a civil lawsuit, which might take years to schedule and complete. As well as costly legal fees and a lot of executive and manager time. And unfortunately, you will likely lose many of those lawsuits that come to trial.

In addition to the direct problems that are caused by these agreements. There are 3 major unintended consequences that you must include in your justification calculations. They occur in the areas of productivity, employee development, and retention. 

  • These agreements will hurt the productivity and the development of current employees – your current employees will likely feel that these agreements are designed specifically to restrict their chances of getting a similar job at a competitor. And as a result, the employee has a lower incentive to improve. So many covered employees will consciously limit their industry networking and, therefore, their personal learning and best practice gathering. And this lower learning level will indirectly stunt their personal development and their own, as well as their team’s productivity.
  • Unfortunately, fewer weak employees will quit – it’s only natural for weak employees with little internal future to speed up their decision to quit. And these losses to a competitor not only hurt their competitor (who gains a weak new-hire). But these weak losses will also help improve the overall productivity of the team that fortunately loses them. However, if those weak employees even suspect that their agreement will limit their external employment chances. Unfortunately, a weak employee’s high fear of failure may cause them to stay with your company forever!
  • Limiting the outside job opportunities of your employees will weaken your managers – because these agreements are designed to limit employees from working in a similar job at a competitor. Your employees that are covered often will have a lower turnover rate (which is good). However, this forced retention will likely also allow your managers to get “lazy.” Because with fewer employees quitting, they can get away with offering less job excitement and career development. And unfortunately, those “lazy managers” are also likely to underperform in other critical management areas, including innovation, communications, hiring, and motivation.
If you only do one thing – proactively share this list of noncompete-related problems with your recruiting leaders and legal team. And see if they will now, with this information, be willing to put a higher priority on quickly dropping the use of these agreements.

Final Thoughts

Under today’s modern “data-driven recruiting.” It is essential that you periodically calculate the dollar costs and the dollar benefits of every individual element of your hiring process. And in my experience, when you do that for the use of noncompetes, in the majority of cases, unfortunately, the resulting ROI has been negative.

Author’s Note 

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About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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