Magazine article HRMagazine

Rethinking NONCOMPETE AGREEMENTS

Magazine article HRMagazine

Rethinking NONCOMPETE AGREEMENTS

Article excerpt

It took a lawsuit and millions of dollars in legal fees to change Josh James' mind about noncompete agreements.

The founder and CEO of Domo, an American Fork, Utah-based cloud computing company, was sued in 2010 by his former employer, Adobe Systems Inc., for violating a noncompete when he started his own business. The two parties settled the case two years later for an undisclosed sum. After that, James tore up the agreements he'd previously required his own workers to sign. Today he's urging other companies to do the same. >

James says noncompete agreements-the legally binding documents that many businesses require employees to sign to prevent them from leaving to work with an organization's competitors, usually for a specified period and in a limited geographic area-are undercutting Domo's ability to attract qualified workers. Additionally, some would-be investors are so skittish about the labor supply in Utah that they've pressured him to move his company to California, one of the few states where the agreements aren't allowed.

James is far from alone in speaking out against the arrangements. They have long been reviled by employee advocates for putting pressure on workers to stay in jobs they no longer want. And it's not even clear that the arrangements are particularly effective.

"If a person wants to leave a job, can you really stop them from taking another one?" asks Cathy Donahoe, vice president for HR at Domo.

About 1 in 5 U.S. workers-28 million people-currently function under noncompete agreements, according to a 2017 study by researchers at the University of Maryland and the University of Michigan. And nearly 40 percent have been required to sign one at some point in their careers.

The growth of the knowledge economy and the penchant today's workers have for job-hopping workers are likely driving many employers to rely on such restrictions to provide an added layer of protection, says Russell Beck, a partner at the Boston law firm Beck Reed Riden. "Intellectual property is easy to take, compared to bricks and mortar," he says.

No one disputes a company's right to protect its proprietary information. But when considering whether to use these restrictive covenants, you'll need to carefully balance the company's business interests against your workers' right to move freely from job to job-while keeping in mind the many state laws regulating the use of noncompetes.

Questioning the Practice

Leaders at Cradlepoint, a 10-year-old company that makes computer networking equipment in Boise, Idaho, were caught by surprise last year when the state Legislature passed reforms that make it easier for employers in Idaho to enforce noncompetes. The changes were supported by established businesses but could hurt young companies such as Cradlepoint that are struggling to find and hire qualified workers in a limited labor pool, says Jodi Richter, the company's HR director.

Some HR professionals are even using their opposition to the agreements as a recruiting tool. For example, Veeva Systems, a software manufacturer based in Pleasanton, Calif., included language in its handbook stating that noncompetes "restrict employees' ability to pursue new opportunities and advance their careers." Veeva promises job candidates covered by such contracts elsewhere that the company will defend their right to work for Veeva, even if a former employer threatens court action.

After spending millions of dollars fending off its competitors' lawsuits, Veeva is now striking back. Last summer, company representatives filed a lawsuit in California seeking to prevent three companies that have enforced noncompetes against ex-employees hired by Veeva-Medidata Solutions, Quintiles IMS and Sparta Systems- from imposing them. Veeva argues that the agreements violate the state's fair competition statutes because they are overly broad. According to the company's general counsel Josh Faddis, the case "could set a national precedent for preventing companies outside of California from enforcing noncompetes against former employees who go to work for California-based companies, whether or not they reside in California. …

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