Why you shouldn’t make your employees sign a non-compete clause

Non-competes rarely hold up in court and can hinder recruitment

Boss presenting a non-compete contract to a janitor

(Peter Arkle)

Like most employers, Markus Latzel asks new hires to sign contracts detailing what will happen if they quit or get fired. The documents contain the standard fare: confidentiality rules, non-solicitation provisions and, as usual, a non-compete clause. It’s meant to protect the business and its trade secrets. “I have the non-compete language in place because the lawyers told me to do it, but I’d never enforce it,” says the CEO of Toronto-based Palomino System Innovations. “I see it as problematic and unfair.”

Part of the problem is how the law has evolved. The modern non-compete dates to an early 1700s spat between a pair of bakers. In the landmark case Mitchel vs. Reynolds, an English court acknowledged that a business person may enforce partial restrictions on another if the two parties had agreed not to trade against each other. Bosses, unsurprisingly, liked this idea very much and, in the 300 years since, non-compete clauses have become a blanket salve for paranoid employers. Last summer, New Jersey–based sandwich chain Jimmy John’s found itself at the centre of an online storm when a staffer posted details of the company’s restrictive contract—one blogger called it “utterly psychotic”—which prevents even front-line employees from leaving for a competitor. A “competitor” was defined as any company that derives more than 10% of its revenue from selling “submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches.”

In the 21st-century business climate, non-competes can be as incongruous—and about as useful—as an earthen bread oven. And, more and more, saddling your employees with them puts you at a competitive disadvantage.

First, and most important, non-compete clauses rarely fare well in the legal system. While every jurisdiction treats these clauses differently, “non-competes are often held unenforceable by the courts,” explains Laura Williams, an HR lawyer whose Markham, Ont., firm does a lot of work related to restrictive covenants in employment contracts. That’s because barring a person from gainful employment is something most judges find distasteful. “A non-compete can very significantly impact a terminated employee’s ability to find other work and make a livelihood,” Williams adds. “From a public policy point of view, that’s not ideal.” Far more favourable in the courts’ eyes are non-solicitation agreements, which prevent workers from actively calling on former clients or co-workers, and confidentiality clauses, which bar people from divulging trade secrets. Neither prevents an employee from working for a competitor.

The ineffectuality of non-competes has been known to bosses and lawyers for some time. But in the age of information, potential hires—especially the savvy, smart types managers might want on their payrolls—are quickly realizing that such contracts amount to little more than meaningless legalese. Moreover, while relatively few people will exhaustively read the fine print of their employment terms, job hunters who hit up Google will quickly learn about their prospective employer’s reputation, and draconian clauses like those imposed by Jimmy John’s are a major deterrent. Gone are the days in which you can expect an employee to blindly sign a contract without pushback.

It’s for these reasons that Alex Handa believes non-competes should be wielded selectively—only in cases where the employee has a “specific and proprietary” role—and that employers should clearly explain the terms at the outset. “A company should not unfairly restrict an employee or limit their job opportunities,” explains Handa, who heads S-Trip!, a Toronto tour operator with a staff of more than 300. “It’s about respect and fairness.”