Why non-compete clauses could be bad for business

A non-compete clause is part of an employment contract that limits an employee’s ability to work for a competitor.

While this may sound like a positive for an organisation in principle, vice-president of research and advisory at Gartner, Aaron McEwan, said they create more harm than good.

“Typically, they’re designed to prevent things like the sharing of IP, or customer lists and that type of thing. So, basically designed to stop all employees from using the information and context that they have to work for a competitor,” said Mr McEwan.

“It’s almost ironic that some organisations kind of see a non-compete clause as a way of retaining their critical talent. Now, I say ironically, because it actually does the opposite. If you think about it, if you’re trying to attract competitive talent into your organisation, and part of your agreement is that, ‘If you join us, you can’t work for another technology company for the next five years.’ If you’re smart [and] talented, you’re probably going to look at that clause and go, ‘Hey, that’s going to restrict my ability to manage my career effectively’.”

With the workforce experiencing a shift through the pandemic, Mr McEwan said that there is no place for non-compete clauses in the businesses of today.

“Since the pandemic, what we’ve seen is a real acceleration of different models of work. So, whether that’s hybrid work models, or increasing things like job sharing, or what we call portfolio careers, gig workers.

“You’ve also got a bit of a generational shift happening. The younger generations are typically not looking for a traditional employment model. They might want to work for multiple employers,” explained Mr McEwan.

Furthermore, these clauses can restrict employees from personal progression.

“Most people know today that the way to keep your skills up to date and maintain your value in the market is to be constantly upgrading your skills and your knowledge and your contacts,” Mr McEwan said.

“So non-compete clauses might prevent an employee, for example, from working on a side hustle, or getting involved in a start-up, where they’re actually learning new skills, they’re developing new networks [or] they’re increasing the diversity of their knowledge base.

“Those things are hugely valuable, not just to the employee, but what they bring back to the organisation.”

According to Mr McEwan, innovation may also suffer as a result: “There’s a there’s an old saying that closed systems die. And so if you’re an organisation and you prevent your employees from essentially accessing the latest and greatest and the kind of innovations that are occurring in their industry, they close their organisation off to that input that could also be really valuable for their own innovation and growth.”

Non-compete clauses are becoming much more prevalent, said Mr McEwan. In reaction to this, governments are reportedly restricting their usage and, in some areas, banning them completely.

With the concept becoming outdated as the workforce progresses, the age of the non-compete clause could be coming to an end.

Mr McEwan continued: “I just don’t think that’s the world that we live in anymore. We live in a world of radical transparency.”

“And then the question becomes, how do you back it up? What do you do if, if an employee goes and works for a competitor after leaving your organisation? Do you sue them? Do you take them to court?”

Pursuing those who have broken this clause could also sow discord among existing employees.

Mr McEwan commented: “Those things in a world of radical transparency will get back to current employees in your organisation. So then, so then there’s this, I guess, a fourth danger, which is an impact on things like engagement and, you know, people’s commitment to the organisation.”

“So, it’s not just about the employee that’s, you know, doing the wrong thing. I’ve put, you know, inverted commas around that. It’s also the flow on impacting into the broader workforce, and they have their colleagues.”