Do Non-Compete Clauses Really Work?

May 1, 2012 Lisa Knight

Do Non-Compete Clauses Really Work?

By Lisa Knight, Partner, Amrop Knightsbridge

Alex is a top performer at a large Canadian financial services firm. As such, he’s in high demand by competing companies. So it wasn’t a surprise when he was contacted by an executive search firm that was recruiting for a competitor.

 

Before long, Alex was on the final short list of candidates for a job that represented more money, more authority and a clear path to the C-suite. But at the last moment, Alex pulled out of the search.

It turns out Alex had signed a contract with his current employer that contained a very specific non-compete clause including a list of companies he was prohibited from working for. On that list was the company that commissioned the executive search.

Non-compete clauses ─ contracts that seek to prevent departing employees from joining competing organizations ─ have been around for a very long time. For the most part, they are considered difficult to enforce, but that hasn’t stopped employers from insisting on non-competes, and making them increasingly specific in a bid to keep competitors from poaching top talent.

In many sectors, it is not unusual for organizations to go so far as requiring new employees to sign contracts that restrict them from seeking employment with a specific list of competitors in the future. This is a more recent trend, and one that has sent many organizations looking for ways to amend existing employment contracts.

Generally, employers cannot amend an employment contract after someone has started working without some sort of change in job description, title, promotion, or salary increase. As a result, it is not unheard of for employers to generate a change in job title or description in order to justify an amendment to an existing employment contract.

Jack Siegel, a labour and employment lawyer with the Toronto law firm Blaney McMurtry LLP advises that “the move to more specific language acknowledges that non-competes that rely too much on broad, general language have proven very difficult to enforce.”

Although non-solicitation agreements ─ contracts that prevent employees from approaching clients of a former employer ─ and contracts to protect intellectual property or trade secrets have found some support, pure non-competes remain a tenuous legal instrument. “The courts have been very reluctant to enforce non-competes that focus just on employment,” Siegel said. “The courts have generally viewed these as contracts in restraint of trade, and that is very difficult to sustain in the absence of very specific justification.”

The trend toward more specific language in non-compete agreements is certainly growing, despite the fact that there is insufficient jurisprudence to date to show that they are more enforceable than their more vague predecessors. And yet, Siegel noted, that does not mean non-compete clauses are ineffective in achieving their goals. “For many, the thought of having to hire a lawyer and fight a former employer is a very unattractive prospect,” Siegel said. “Notwithstanding the stress and the cost, many top executives believe their reputation can be damaged if word of a lengthy legal battle with a former employer leaks out. And, although it may seem overly idealistic, many people just don’t like the idea of breaking a contract for any reason. The threat of having to pay legal bills to defend yourself is certainly part of the deterrent,” Siegel said. “But these are people who have freely agreed to a contractual obligation and many will feel a moral obligation to respect the contract. They simply accept the notion that ‘my word is my bond.’"

The growth in specific non-compete clauses has also prompted some employers to offer to indemnify recruits against legal action from a former employer. This is, in many ways, a reflection of the desperate battle for top talent that exists in today’s labour market. It is also a way for the hiring employers to level the playing field so that the contest is between two employers who are fairly equal in their resources versus being between an individual and an employer, who are not as equally resourced.

Understanding that some organizations are going to more extreme measures to stop the loss of top talent, those who are looking to attract those employees are increasingly willing to foot the bill to extricate a coveted recruit. However, it can be difficult to determine if a recruiting organization is willing to indemnify; many are generally reluctant to confirm offers of indemnification for new recruits out of a fear it will prompt former employers to launch legal action simply to see if they can elicit a settlement.

The irony of the trend toward more specific and aggressive non-compete clauses is that, ultimately, it does not mean an organization will be better at recruiting or retaining top talent. In fact, employers that develop a reputation for insisting on restrictive non-competes may find that it dampens interest among top talent during executive searches.

In the war for talent, this is a primary example of the left hand not knowing or acknowledging what the right hand is doing. On the one hand, there are many organizations out in the labour market trying to attract top talent away from competitors. On the other hand, once recruited, that top talent is then asked to sign restrictive non-competes in a bid to keep them from doing what they have just done to their former employers.

In the final analysis, non-competes may stem the flow of top talent from an organization, but it will not generate any real loyalty. And given the tenuous nature of the contract, it may not ultimately fulfill its stated purpose. Worst of all, too much focus on restrictive employment contracts will likely erode emphasis on more effective employee engagement and retention strategies that are not only less extreme, but considerably more successful at finding and keeping top talent.

If your organization is serious about attracting and retaining the best talent at senior levels, you need to increase leaders’ desire to join and to stay — rather than handcuffing them.  Major drivers of engagement you have to work with include increasing the value they are able to add by allowing them to build and own something, by enhancing autonomy and authority, and making it easier for them to get this done by fostering collaboration and the leader’s connection to a community of leaders. 

About the Author

Lisa Knight

Lisa Knight is a Managing Partner at Lee Hecht Harrison Knightsbridge. Lisa is a career executive search professional with 25+ years of experience in the industry and works primarily with clients in energy/utilities, retail/consumer, technology and professional services to help them advance their businesses through the acquisition of top talent.

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