Matthew Marx: Non-compete agreements and their impact on employees

MIT Sloan Asst. Prof. Matt Marx

For businesses that use them, non-compete agreements, which typically bar their employees from joining rival companies for one to two years, offer a clear benefit:  They prevent employees from going to a rival with the knowledge and skills they have acquired on the job. But these agreements also carry a high cost for the employees, many of whom did not realize they would be bound by them until after they accepted the job offer. According to my new study of more than 1,000 engineers, about one-third of workers who have signed non-compete agreements end up leaving their chosen industry altogether when they change jobs, often at significant financial cost.

Non-compete agreements constrain those who sign them, often leaving them with a choice of staying where they are, or taking a career detour that can lead to lower pay and less use of the skill sets they have developed over years or even decades. The findings of my study appear in “The Firm Strikes Back: Non-compete Agreements and the Mobility of Technical Professionals,” published in this month’s issue of the American Sociological Review.

My study found that about half of tech-sector employees are required to sign non-compete agreements. And while these pacts are generally associated with information technology firms, they are commonly used elsewhere: Biotech companies use non-competes as much as the software industry does. The agreements are also a matter of state law. Some states, including Massachusetts, enforce them; others, including high-tech hubs California and Washington, restrict their use, thus allowing workers to change jobs more freely.

But for workers bound by non-compete agreements, the consequences are serious, according to my research, for which I surveyed 1,029 engineers, who were initially randomly selected from a variety of high-tech fields. I also conducted separate in-depth interviews with 52 people who have worked on voice-recognition technology, a field in which I once worked. The overall finding is that nearly one-third of tech workers who sign non-compete agreements end up in entirely different industries when they take their subsequent jobs. And in many cases, these workers stopped applying specific skills they had developed — often after obtaining a PhD — and took pay cuts. In short, these people take a career detour, they sometimes earn less money, they lose touch with their colleagues, and their skills atrophy.

Defenders of non-compete agreements note that well-educated employees should recognize these pacts as a standard practice and understand the implications of signing them. But 70 percent of the people I surveyed said they were told they would have to sign non-compete agreements only after they accepted the job offer. Half the time, it was after they showed up for work. People become more savvy as they get older, but many are blindsided by the requirement, especially early in their careers.

As a remedy, Oregon recently passed a law requiring firms to make clear in offer letters if employees will be expected to sign non-compete agreements. In my ongoing research, I’ll be examining whether an awareness of non-compete agreements pushes high-tech workers to look for jobs in states such as California where non-compete agreements are a non-factor. I am also researching whether non-compete agreements affect the flow of workers within industries, and whether they affect the pool of talent available to smaller companies and startup firms.

See the full article in the American Sociological Review

Matthew Marx is the Alvin J. Siteman (1948) Career Development Professor of Entrepreneurship, Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management

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