The Pros and Cons of Noncompete Agreements

Many companies spend resources on training their employees and seeing to their professional development. Although it’s not as common in our gig economy, people will sometimes put in 25 years or more at one company.

No business owner wants to see their employees jump ship and join competitors — but it happens. Trade secrets and valuable customer information are also at risk when workers leave a company. That’s why it’s common to see businesses protect themselves from losing high-performing, quality people.

Not all states have the legal jurisdiction to incorporate noncompete agreements (NCA) in their business operations. Having employees sign these contracts come with both benefits and limitations.

Here are some of the pros and cons of using noncompete agreements.

What is a noncompete agreement?

An NCA is a document signed by an employer and their employee. It outlines an agreement that the employee won’t work for a competitor in the same industry or other related business endeavors.

Many employers will introduce an NCA to an employee during the hiring process — sometimes, companies will refuse to hire candidates who choose not to sign the NCA. They can be time-bound and have specific terms and conditions.

For example, if an employee chooses to leave a company, the NCA may come into play for the next six months or a year, depending on the agreed-upon terms.

State regulation monitors the effectiveness of NCAs, and not all states are supportive of their usage. Nevertheless, according to the U.S. National Treasury, about 18% of all workers in the country have signed an NCA.

Some argue that NCAs stifle innovation because employees work out of fear of losing their jobs. More research is needed, but the topic of NCAs will continue to be a pressing issue in the future.

What are the benefits of noncompete agreements?

Often, NCAs benefit the employer more than the employee.

Here are some of the benefits NCAs offer:

• They discourage employees from leaving. High performers will likely remain at one company to maintain their employment status and a good reputation.
• If employees leave, there’s no worry that they will start a competing business.
• With specific terms and conditions of the agreement, employers can be repaid for training if any worker leaves soon after receiving the training.
• NCAs protect employer’s assets, like intellectual property and trade secrets, to stay ahead of the competition.
• They prevent long-term losses for employers.

If an employee were to break an NCA, they could be liable. It can be challenging to know if an employee breaches their NCA, but an employer must know the signs they have done so.

Five drawbacks of noncompete agreements

Businesses must understand the drawbacks of noncompete agreements to help them make educated decisions on enforcing them. Some of these include:

1. They restrict employees from making fair career moves and may take away a worker’s sense of freedom
2. There’s an increased risk of entering a legal battle over an NCA
3. There’s no one-size-fits-all approach to instituting NCAs
4. Courts tend to favor the employee side of the agreement
5. NCAs aren’t always enforceable

Although this list does not include all the drawbacks, it can help narrow down the decision for business owners on whether or not to use them.

There’s controversy surrounding the usage of NCAs in business. In fact, the Federal Trade Commission holds workshops to discuss the implications of NCAs and the impact they have on the working class.

Understanding how to use noncompete agreements

Businesses must weigh the pros and cons of using noncompete agreements in their operations. Before deciding to use an NCA, it may be a good idea to consult the company legal department to learn all the nuances.

Both parties signing the agreement must be aware of the terms and conditions they’re agreeing to. It would be unethical to have an employee sign a document without reviewing and understanding it first.

Striking a balance between protection and freedom is vital — employees deserve fair and equal treatment. Still, businesses should also protect their investments and assets in some way, shape or form, and an NCA is a great way to do so.