Dear World — Please void all Non-Compete Clauses

It’s killing innovation and productivity!

It’s still hard to believe that in this day and age, companies are still enforcing non-compete clauses in their employment contracts. The fact that many countries still have such a clause in place within their employment contracts indicate that there must be valid reasons to do so.

But wait…what’s a non-compete clause?

Basically, a clause of this sort, is an agreement set forth by an employer stipulating that an employee is prohibited from engaging in any work with a competitor or from starting a competing business for a pre-defined period of time. Enforcing such a ban on workers can create far reaching effects for their industry and also for the economy as a whole. So lets firstly understand why such contracts exist in the first place before delving into a viable solution for both the employer and the employee.

So what could be their reasons?

1. Protection of Trade Secrets
   Depending on the type of business, it is very likely that employees may be privy to certain types of valuable and confidential knowledge when working for a particular company. This scenario is very much a reality for many technology firms involved in designing and developing systems sourced from years of research and investment into Intellectual Property (IP). Obviously, not all workers will be subject to this information, however, it can be concerning and detrimental for businesses to relinquish specific employees without contractually binding them to a Non-Disclosure Agreement (NDA) of some sort.
2. Weak Return on Investment (ROI)
   When businesses take on new employees, it’s more often than not that a a company makes an investment in training, further education, certification and others, spending both time and money in bringing their workers to a certain level of competency. As such, with such a significant investment, businesses prefer to protect their interests by enforcing a non-compete clause in its contracts.
3. Development of New Technologies
   With many companies involved in technology, it’s only natural, that down the road, new technologies are created, enhanced and innovated over time. These innovations can potentially place said businesses into a position of competitive advantage. And with this, those who were involved in the creation process of such technologies are placed under heavy scrutiny if they so decide to leave for greener pastures.

Understandably, the above can be said to be both valid reasons and concerns for businesses to consider imposing such a clause, however there are many arguments against such policies and perhaps even a compromise.

So, let’s consider why non-compete clauses may not be such a good idea for industry, productivity and innovation, especially in today’s world.

1. Impedes Labor Mobility
   As you can well imagine, when you stop people from participating in the workforce by blocking their opportunities to move to other companies of similar nature, you’re effectively hindering the free movement of labour across industries. Not only does this have negative effects on competition, it also puts quite an amount of stress on the workers to either continue on with their role or decide to move on elsewhere, but suffer from the likelihood of not being able to work with someone else of similar work nature for an extended period of time. This can ultimately trickle down into personal and family problems.
2. Stifles Innovation / Productivity
   The biggest reason against non-competition clauses lies in the fact that it has the ability to hinder the growth of an industry by blocking innovation. Just picture an engineer working for who decides to leave for Tesla. And imagine the wealth of knowledge and experience he or she could bring to the table and vice-versa — Battery technology, Artificial Intelligence (AI) and general automotive expertise. Alternatively, someone who decides to move from Uber to Lyft could offer valuable insight into the car sharing industry. Having such restrictions in place prevent these individuals from sharing knowledge which would otherwise be lost and not utilised, simply for the sake of discouraging healthy competition. It also slows progress and advancement, since these people now cannot work in a similar industry for many months or even longer.
3. Increases Barriers to Competition
   Competition is healthy and friendly. We all experience it when walking down the isle at the supermarket, or buying that gift for someone at the shopping mall and we also see it driving to work. If competition was non-existent, there would only a single brand of product of pasta sauce which would make our spaghetti, a single brand of shoes to clothe us and only a single car manufacturer to drive us to work. The reason we’re surrounded by so many types of different models, makes, brands etc. is because someone decided to compete. Competition brings down prices, allows for product / service diversity and forces businesses to innovate by entering new markets, enhancing their current offerings and promotes investment in R&D. Moreover, a 2016 report released by the the U.S. Treasury suggested that states with non-compete clauses resulted in lower hourly wages.
4. Brain Drain
   In the extreme case, it is a likelihood that certain individuals might be concerned about their job mobility. As such, these people may decide to pack up and leave their areas for opportunities and a landscape which cultivates an environment towards promoting competition. It’s also interesting to note that California; the home of Silicon Valley is one of a very few States which completely void non-compete employment contracts. Go figure.

OK I get it. It scares companies to think about letting someone go with the thought of sharing valuable information with their competitors. But perhaps the time has finally come for businesses to think about helping promote an ecosystem which fosters job mobility, supports and promotes innovation, as well as eliminates barriers to job competition. If a company believes their trade secrets are at risk, some non-disclosures clauses are definitely warranted however not to the extent from barring and / or delaying people from moving between businesses. Justin Fox’s Bloomberg article takes a deeper look into how and why Silicon Valley has become the place it is today with emphasis on understanding the tyranny of non-competition contracts.

If societies and its industries really want to take advantage and get on-board the innovation and productivity train, then it must wholeheartedly embrace the idea of competition. One company’s loss and is another’s gain. So if the right incentives are given and the type of work is impactful, then companies its workers, the industry and the ultimately the economy will reap the benefits.

Published in TheHarvest
As technology continues to advance, there is a duty for all of us to ensure no one gets left behind. Here, our mission is to help societies build and grow their own technology hubs and innovation centers. Welcoming submissions on innovation, education, funding and startups.