Employees, Beware Non-Compete Clauses

Orly Lobel is a professor of labor and employment law at the University of San Diego and author of "Talent Wants to Be Free."

Here's an edited transcript of our interview:

Corporate executives often sign contracts that restrict future employment with a competitor. But now these “noncompete” agreements are more common. Why?

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Noncompetes are showing up everywhere, from the service industry to the media. They are showing up in low-skilled manufacturing jobs. In a competitive job market, a lot of employers view noncompetes as standard. The more companies perceive that their value stems from human capital, the more they try to restrict it from flowing to a competitor.

But your studies show that these contracts are problematic for both employees and companies.

Noncompetes limit the mobility and career trajectories of employees, and that can lead to a lack of motivation for workers. For employers, noncompetes have a detrimental effect on recruitment. If you signal that you are the kind of employer that nobody can leave later on, then you are going to get the lemons and not the cherries.

How should you deal with a noncompete contract when starting a job?

You have to recognize it first. Somebody might not even realize he or she is signing one when, for instance, clicking on a Web agreement. Sometimes the noncompete appears in an employee manual, and it is usually enforceable if the employee has acknowledged receiving the manual. An employer can create a de facto agreement without using the word noncompete. It could say, “You agree not to solicit any customers or potential clients of the firm. You agree not to use any proprietary information.” If you agree to this, then you basically agree not to use the skills, knowledge and network you have acquired through your work experience. People do not want to risk losing job offers, but managers may be open to negotiation. Try to find out if the firm has enforced non­compete clauses or been litigious in the past. There is great variation among companies. Be cautious about signing con­tracts that take away the potential for either going to a competitor or starting a business in the future.

What if you’ve signed an agreement and want to leave your job?

You can stay in your industry, but move out of the region to avoid competing with your old employer. Or take a professional detour. If those aren’t options, you may have to risk a lawsuit by going to a competitor. It can be a worthwhile risk. There’s a huge variation in how states treat noncompete clauses as far as what is enforced and what is voided.