In Defense of Non-Compete Agreements
I saw recently that my current state of residence, Minnesota, will be banning employers from using non-compete agreements as terms for employment. Full disclosure—while I signed such a non-compete agreement myself when joining my current employer, I am not impacted by this law for a couple of reasons. For one, it doesn’t go into effect until July 1st, 2023, and all non-competes established before that date are still considered valid. Second, it only applies to employers based in Minnesota, and while I live here, the agency that employs me is not based in Minnesota, so that too prevents me from being impacted. That said, I am very much opposed to this ban, and believe it will do much more harm than good.
I’m not of the opinion that non-compete clauses are a universal good, of course. Like most things in life, they have upsides and downsides, and whether the costs outweigh the benefits will be different for different individuals facing different circumstances and trade-offs. The costs are fairly obvious—they put up a barrier to finding new employment after one departs their current job. So, what are the benefits?
One benefit is increased wages. Employers must offer higher wages to prospective new employees to make them willing to accept a non-compete as part of their terms of employment. To see this, just engage in a bit of introspection. Imagine you had two job offers from two different employers. Imagine that everything about the job offers was the same—the type of work, hours, paid vacation, family leave policy, and so forth. The only difference between them was that Company A requires to you sign a non-compete, while Company B does not. Immediately, that makes Company B seem more attractive, all else equal. In order to overcome that, you’d require Company A to offer you higher wages than Company B. Or more vacation, better working conditions, longer paid family leave—there are multiple margins that can be adjusted. But the point is that you’d need something about Company A’s offer to improve relative to B, to make you willing to accept that extra restriction. Are those offsetting benefits “worth it?” The answer for that will be different for everyone. In my case it was, but unlike the legislators and governor of Minnesota, I don’t consider myself fit to determine a single, one-size-fits-all answer to be imposed on everyone else.
Non-competes also provide benefits to employers. Using my own circumstances as an example, as part of my employment, I’ve taken training and acquired certifications for electronic medical records systems, in order to both more effectively perform my job and increase the number of clients I can assist. This training and certification process was sponsored and paid for by my employer—and it’s not a simple or cheap process. There are benefits to employers in investing in the skills, training, and certification of those they employ. But the willingness of employers to do so will be diminished with the prospect that they might sink the resources into providing an employee that training, only to have that employee immediately jump ship to a competitor, sticking them with the cost while their competitor gets a better trained and credentialed employee free of charge. In the absence of non-competes, employers will be less willing to invest in providing their employees with the kind of training and support that will help them advance their careers long term—so employees will bear some of this cost too.
Again, I’m not saying that non-competes are universally worth it. Some people will find them their best option, others will prefer options without a non-compete. But legislation like this is likely to be either useless or harmful in any given case. If an opportunity involving a non-compete isn’t a given worker’s best option, according to that worker’s own preferences and values regarding the trade-offs involved, then the new legislation is useless because the worker wouldn’t have signed the non-compete anyway. And if an opportunity involving a non-compete is the best option for a worker, the legislation will be harmful because it’s taking away that worker’s best available option and forcing them into an arrangement they find less beneficial. There is no one-size-fits all answer for things like non-compete agreements—regardless of what the legislators and the governor of Minnesota dictate.