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Here is a paper I wrote on this topic that concludes that non-compete agreements are unnecessary and actually hurt businesses and the economy.
Uncovering Non-Compete Agreements
Ann, who always wanted to be a fitness instructor, got a job at a local studio to build experience and strengthen her teaching technique, while learning how to operate such a business. After a few years, she finally decided she was ready to open her own studio. To her surprise, as she was handing in her resignation, her employer dug up the employment contract she signed and pointed out the non-compete clause. This agreement means that Ann cannot work for another employer in the industry or start her own business within the territory of her former employer for two years. To start her business Ann would have to move out of the state and since she cannot afford to move, she must either change her career path or be unemployed for two years. It is important for all employees to be aware of non-compete agreements (NCA’s), because most people do not even realize they have signed one or have knowledge of the restrictions being placed on them. When they are employed at an establishment that uses this clause, people are often blind to the fact that they have signed away their right to work for another company or start their own business in the field they are pursuing. Imagine being an entrepreneur who has put everything they have into opening a business only to discover a hidden clause in a past contract is preventing them from reaching their dream. Entrepreneurs help spark the economy and provide opportunities for growth. Because of this, even Congress is at arm as to the enforceability of the contracts, trying to balance employee rights with a company’s right to security. Research shows that NCA’s favor employers, while stripping employees of their rights and harming the economy, which leads to the conclusion that non-compete agreements should ultimately be abolished.
Kessler, Bass and Yeargain’s article “You Belong to Me: Employer Attempts to
Keep Employees from Quitting to Work for Competitors via Non-Compete Agreements
in Employment Contracts” surrounds the arising conflict that legislature and the courts are unsure whether NCA’s should be enforced. In deciding the enforceability the courts must compare the rights of employees verses employers. Where employees are concerned, these contracts prevent them from advancing in their field and limit their employment opportunities. They may also end up a dependent of the state if forced into unemployment (Kessler, Bass, and Yeargain 23). On the side of employers, the authors state that NCA’s are often used when hiring new employees or in the case of a buyout or company merger; so new owners can ensure employees will not leave with important company information (13). Basically, the agreements are used to protect company trade secrets and intellectual property, but are these agreements going too far? The authors believe, and I agree, that there are alternative solutions that are fairer. Employers and owners would be the first to disagree and say NCA’s are necessary for their company’s protection, but Kessler, Bass and Yeargain provide three alternative solutions that will allow employer investments to be protected, while not limiting employees. The first approach is cost-sharing. This covenant ensures an employee would work at a company for a specific length of time in order to cover the costs of training. However, if an employee wishes to quit earlier they may do so by paying an agreed sum to cover the costs. Another similar approach identified by the authors is rebate tuition. This solution would involve an employee being indebted for the sum of their tuition, but every year they work for the company, a set percentage of the debt would be “forgiven”. If an employee leaves the company before the debt is fully absolved they pay the remaining amount. The last solution provided is a promissory note. With this an employee would receive an advanced salary for a set time and if they resigned they would owe the company back what they did not earn (Kessler, Bass, and Yeargain 19-20). All of these solutions work to cover the cost of employee investment, but they do not address an employer’s concern for the protection of their intellectual property. I still believe a NCA is excessive, but a non-disclosure agreement would give an employer security without limiting any employee rights. This article ultimately comes to the conclusion that in states where legislature could agree on the proper provisions of a NCA, they should be allowed. Yet, if there is conflict a consensus should be reached. This could either be with the promissory note, cost sharing, or rebate tuition. I conversely feel NCA’s should be abandoned all together. A non-disclosure agreement would cover the employers concern of protecting intellectual property.
Employers may continue to say that while there are alternatives to protect company systems and cover training costs, what about the additional investment in employees? With high turnover rates and cost of investment in human capital, this is an important issue to employers. While I concede that an agreement for an employee to work with a company for a set amount of time is reasonable, it is unnecessary for an employee to be restricted from working in their desired field after the time is fulfilled. Any of the above solutions presented by the authors could be appropriate supplement protection if an employer deems it necessary. Further, an employer cannot expect the knowledge they impart on an employee to be their “property”, as the authors state is the opinion of many employers. From personal experience I know the objective of many jobs is for employees to gain experience and knowledge and apply it to advance their careers. What someone learns is their own “property” to use as long as it does not involve the disclosure of trade secrets.
As discussed, when it comes to NCA’s and their place in business, employees and employers are on two different ends of the spectrum. In the article “Is it Time to Eliminate Non-Compete Agreements”, Mayfield and Borstorff consider employee and employer views along with the consequences of NCA’s, arriving at the conclusion to eliminate the agreements. The case aimed to answer the question of whether NCA’s serve to protect a company’s intellectual property or if they ultimately only limit employees future employment opportunities. Mayfield and Borstorff’s research surveyed 551 students and faculty members about their understanding of the agreements and the majority responded that “a company that requires employees to sign a non-compete clause or agreement only does so to protect its own interest without concern for the employee”(13). This reflects the fact that NCA’s are unjust for employees; they are held back in order for a company to feel secure by controlling an employee’s future. The impact on employees greatly outweighs the benefits for employers and is not necessary. As discussed before, there are alternate means to protect a company that are more fair. Further, the article states that many NCA’s are unduly broad. Many consist of a time period of two years or greater after employment ends and covers any “similar” business within 150 miles of “any” geographic area (15). This is so broad that an employee would basically have no options in their career to pursue. It would ultimately leave an employee jobless for at least two years.
As an economic minor, I can recognize that there will be great harm caused to the economy that will affect all employers, employees and the government alike. First, NCA’s hinder the economy by allocating unnecessary funds to people who are rendered unemployed because of the agreements. For agreements where the employee must leave the state to work, talent is forced out of local economies. Additionally, entrepreneurs are impacted the worst and as a result local economies suffer. If an entrepreneur works at a job to gain experience in their desired field, when they must move to start that business local growth is diminished. Nationally, where the agreements are so broad, entrepreneurs may not be able to start their business at all, reducing overall economic growth. Many employers may respond, why should I care? At least I know my company is protected and prosperous. What these employers do not realize is the NCA’s work both ways. NCA’s block the flow of talent. They create a shortage of workers who are restricted from working in their field, meaning companies will be unable to hire new workers with a fresh perspective. Additionally, Hill and Borstorff shed light on a study that revealed “non-compete agreements may actually decrease the motivation in workers”(16). This is because the agreements create friction between employers and employees, since employees feel restricted and forced into an unpleasant situation. Both effects of NCA’s lead to an unproductive company that cannot reach it’s full potential.
It is easy to understand why employers would favor these agreements to protect their intellectual property, trade secrets, and investment in human capital; however, NCA’s are unfair to employees, limiting their rights and career advancement. They also hurt the economy by stifling innovation, progress, and productivity. There are many alternate solutions to protect employers that do not have ill effects on others, such as non-disclosure agreements, cost-sharing, rebate tuition, and promissory notes. For all of these reasons, non-compete agreements should be removed from business. In the meantime, while they are still around, employees need to be careful. It is important for everyone to know their rights and what they are agreeing to before they end up signing away their future and right to pursue their dream career.
Kessler, Lara L., Bass, Anna N., and Yeargain, John W. “You Belong to Me: Employer Attempts to Keep Employees from Quitting to Work for Competitors via Non-Compete Agreements in Employment Contracts”. Journal of Legal, Ethical and Regulatory Issues 10.2 (2007):13-23. ProQuest. Web. 5 Oct. 2016.
Mayfield, Hill, and Borstorff, Patricia. “Is it Time to Eliminate Non-Compete Agreements?”. International Academy for Case Studies 22.2 (2015): 12-16. ProQuest. Web. 5 Oct. 2016.
I am probably a good person but I haven't taken the time to fill out my profile, so you'll never know!