Why understanding noncompete contracts matters

Many business owners and employees have presumed that noncompete clauses affect only senior executives. However, noncompete clauses are now affecting employees at many levels, which is why it is important for both business owners and employees to learn about them.

A former factory manager is an example of the impact that noncompete clauses can have. Working for a textile company, he found that his pay was much less than he needed due to the 2008 financial crisis. He felt fortunate when a rival textile company talked with him about working for them, in a higher level position with a better rate of pay. He accepted their offer.

However, the company that he had been working for invoked the noncompete clause in his contract to stop him from working for their rival. That resulted in a three-year legal battle that devastated the man's savings and just ended in May. His case shows how noncompete clauses in contracts are affecting blue-collar workers and the companies they work for.

Indeed, a recent survey showed that, at some levels, one in five employees have noncompete clauses in their contracts. Another survey, which is done annually, showed that trade-secret and noncompete lawsuits have close to tripled since 2000. This trend is viewed as an indication that companies want ownership of their employee's work experience and expertise, to the extent of preventing the employees from bringing those assets to a different company.

Some people, such as a Princeton economics professor, contend that the trend of increasing noncompete clauses in employee contracts is unfair. Those people say that noncompete clauses make experience and expertise a liability for employees, since they can't use them to leave one job and secure a better job. That makes employees less mobile, and reduces their ability to negotiate for the best possible compensation package. For all of those reasons and more, it is important for companies and employees alike to understand the ramifications of noncompete clauses in contracts.

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