States move to keep noncompete agreements from shackling workers to jobs

Brian Connolly had his career sidelined in the aftermath of the Great Recession, but not for the reason you think.

A veteran of the medical devices industry, with degrees in physics and computer engineering, Mr. Connolly’s skills and experience are valuable in Boston’s bustling biotechnology sector.

“In 2008 I joined a startup,” he says. “By 2010, the funding went south and they laid off everyone” but the founders. He was soon in discussions for a position at another company. But in looking over his employment contract, he found a clause prohibiting him from working in his area of expertise – medical device development – for at least a year. Both an employment lawyer and the new company’s recruiters advised him not to take the new position.

Connolly had known about such contracts, or noncompete agreements before – they’re common in industries developing new technology. But he had never been subject to one that limited his movement to a new job. “It created a big problem for me,” he remembers.

He spent his year working at a friend’s consulting company for far less pay and no benefits. “I was in my 50s and very conscious in this gap in my 401(k), he says. “It took 18 months to start [saving for retirement] again.”

Stories like Connolly’s have struck a chord with Massachusetts lawmakers working to get noncompete reform through the state legislature. Both the state House and Senate have passed versions of a bill that would offer workers more protections.

“Noncompetes serve a legitimate purpose, but like every other tool they can be abused,” says Russell Beck, a partner at the Boston law firm Beck Reed Riden LLP and a leading authority on noncompete litigation.

Used improperly, not only are such agreements onerous on workers, opponents argue, but they’re bad for state business, especially when it comes to retaining valuable talent. The Bay State, for example, loses a good chunk of business school and tech graduates to California, which has some of the strongest laws protecting workers from noncompete clauses in the United States. Because of this, several members of the Massachusetts venture capital community support the reforms.

“Careers will be more constrained in states that enforce noncompetes,” says Matt Marx, an associate professor at MIT’s Sloan School of Management in Cambridge. “I teach 150 MBA students each year, and every year several come to me and say, ‘I have two job offers. One is in Boston, one is in San Francisco.’ I say, ‘If you want to start your own company in a few years, go to California.’ It hasn’t made me very popular around here.”

More recent outrage around the issue has surrounded the spread of noncompetes to low-income workers in businesses like hair salons, summer camps, and even fast food restaurants.

“The very first constituent I heard from on this topic was a young man who held a seasonal job applying pesticides to lawns each summer,” Lori Ehrlich (D), a Massachusetts state representative who has been working on noncompete reform for nearly eight years, writes via email. “His noncompete was outrageously broad – it prevented him from working in the off-season spanning a three-year time period.”

Companies who defend the practice argue that such agreements are vital to the successful operation of their business. A coalition of Boston business interests, including the city's Chamber of Commerce and the Massachusetts High Technology Council (which counts companies like DraftKings and TripAdvisor among its members), have come out in opposition to many (but not all) of the reform proposals.  

But opponents argue they have become a lazy way to retain workers, with little cost or risk to the employer.

“This practice is obviously a burden for individuals but it also has serious negative impacts on the overall economy,” Representative Ehrlich says. “In recent years they have been used in every sector.” 

Dating back to medieval times

Noncompetes are centuries old. Experts trace the earliest dispute over such a contract back to 1414, when a clothes-dyer’s apprentice in England opened a business in the same town as his former master.

In the present day, noncompetes have typically been used for employees in the upper echelons of industries that rely on trade secrets, institutional knowledge, and longstanding interpersonal relationships – think biomedical research, the tech sector, and certain types of sales, Mr. Beck says. “They’re appropriate for employees that actually pose a risk” to a business being able "to operate upon their exit.”

In addition to protecting trade secrets, he notes, “one obvious one is it gives greater incentive to invest in employees,” because there’s less concern about attrition.

“You also see them in any type of B2B [business-to-business] sales role, especially where there’s an ongoing need,” he continues, like between a firm that sells lab equipment and a scientific research facility. “The salesperson might be the face of the company, and the [buyer] may develop a relationship with the person and not the [selling] company.”

In recent years, however, noncompetes have prompted criticism and closer scrutiny. First, they are surprisingly ubiquitous: According to a March 2016 report from the Treasury Department, 30 million Americans, or about 18 percent of the US workforce, are covered by noncompete agreements. Second, Beck says, they are limiting workers’ outside careers beyond what many would consider reasonable. In Connolly’s case, the contract was written in such broad terms that it prevented him from working in the field altogether.

Mark Muro, a senior fellow at the Brookings Institution, says that writing agreements with broad strokes can be a major roadblock to career advancement.

“Job-hopping is an important driver for workers to move up the value chain and do more advanced work in their field,” he says. “There’s a fundamental freedom in quitting your job and getting a better one, and this interferes.”

A broad reach

They also are being extended to low-level, low-wage workers who it would be hard to argue have specialized knowledge vital to a company's operation. In June, in cooperation with the New York attorney’s office, Jimmy John’s stopped including noncompetes in its employee contracts after two assistant store managers sued the sandwich chain. The contracts barred former employees, including those assembling and delivering subs for minimum wage, from working at Jimmy John’s competitors for two years after leaving the company.

“It’s like, how many ways are there to spread mayonnaise?” Connolly wonders.

Other examples include restrictions on unpaid interns, instructors at yoga studios, and hair salon employees. In 2014, a summer day camp in Wellesley, Mass., made headlines for requiring its teenage counselors to sign noncompetes, which prevented them from even taking babysitting jobs for a full year after working at the camp.

Companies don’t typically take legal action against workers who break such contracts. In fact, the lawyer defending Jimmy John’s in its lawsuit argued that the company had never intended to enforce its noncompete against the two workers who sued (and the judge in the case agreed).  

“Judges are reasonable, and they generally aren’t going to let companies squash little employees,” says Mr. Marx at MIT.  Still, he says, they make workers and startup companies, who probably don’t have the resources to do legal battle with a big company, think twice about even taking the chance.

In a 2011 academic paper, Marx found that about half of 1,929 tech engineers surveyed across a wide range of industries had signed noncompetes. “It wasn’t top executives. These were used with regular individuals.”

He also found that those who had signed such agreements were more likely to take time away from their field, or a “career detour” to avoid getting hit with a lawsuit.

“Say I want to move jobs, but I remember I’ve signed this. Am I even going for an interview, and if I get the offer will I take it? People in my research told me they were too scared,” he says.

States seek solutions

The Massachusetts bill took years to hammer out as lawmakers sought to strike a compromise between the freedom due workers and the need for businesses to retain and protect valuable knowledge. Both houses have passed versions of the bill, which is being worked out in committee. 

Other states have taken up the issue in recent years. In 2012, New Hampshire took a series of steps to tighten up noncompete agreements, most notably requiring employers to tell prospective employees about them before they accept a position (70 percent of the engineers in Marx’s survey said they only found out about their noncompetes after the fact).  

If a company in Utah moves to enforce a noncompete and a judge rules against it, it has to pay the employee’s legal fees – a restriction meant to prevent companies from counting on workers’ fears of costly court battles to discourage them from switching jobs.  Last year, Hawaii took a page from California’s book and entirely banned noncompetes in the state’s tech sector. Even the White House is looking into new regulations, such as prohibiting businesses from forcing hourly workers to sign noncompetes.

Connolly found work in medical devices quickly after his noncompete ran out, and now he’s back to his old level of pay. But earlier in his career, he thinks, the time away would have been much more damaging.

“My situation I got through with a few bumps and bruises, but I feel bad for [young workers] and students,” he says. "Who knows if they will have jobs available to them after a year or two away?”