Aug 10 2009

Non-Compete Agreements Hinder Job-Switchers

By kyle stock

As if pink slips and shrinking paychecks were not bad enough, legions of finance professionals now find their careers hamstrung by onerous and esoteric non-compete contracts.

Such agreements, which preclude an employee for working in a similar capacity at a rival for a period of time, typically peak in bull markets. However, in today's lean economy, finance firms are going out of their way to keep their most profitable businesses intact, even if it means blocking laid-off workers from new jobs.

"Companies are not taking these things lying down these days," said Steven Mitchell Sack, a Manhattan labor attorney and the author of "The Employee Rights Handbook." "If someone draws up a restrictive covenant, they're going to try to enforce it. They want to protect their turf."

Sack has fought employers over noncompetes for three clients so far this year. Although judges often favor the worker, he advises professionals to negotiate shorter non-compete agreements before accepting an offer or, at least, to get the employer to grant "garden pay," compensation for the window of time when the employee would be blocked from a new job.

Sack also counsels workers to negotiate an indemnification agreement with a new employer, which commits the company to cover the cost of fighting a non-compete suit if the previous employer files charges.

Court dockets in New York have been crammed with a number of lawsuits over poaching this year. In early March, Merrill Lynch sued Deutsche Bank for swiping about a dozen of its investment bankers.

In May, Jefferies Group Inc. grabbed some three dozen employees from UBS, including its highly lucrative healthcare team. UBS called the move a "massive, premeditated raid" though it eventually dropped its lawsuit and ditched a restraining order.

Non-compete contracts, however, seldom keep recruiters at bay or prevent defections.

In his 13 years of headhunting, Adam Zoia, founder of Glocap Search LLC, one of New York's biggest recruiters, has only had a couple of cases where a noncompete created an obstacle. Typically, the two firms negotiate a deal or the original employer does not hold the worker to the contract.

"At worst, they are a delay," Zoia said. "Our clients always want the same thing, the best available talent. Their general attitude is: 'We'll work through it.'"

Zoia said the recent rash of high-profile lawsuits over defections was based on frustration rather than practicality.

"These kinds of lawsuits, at most, will get a financial settlement," he explained. "You never see the people not end up working at the new firm. It's really just posturing, a way to send a message and give someone a headache."

Workers, in turn, seldom pay much attention to their employment contracts and very few negotiate the terms of a noncompete before signing.

Matt Marx, an assistant professor of entrepreneurship at MIT's Sloan School of Management, was twice forced to sign non-compete agreements after moving across the country for a job. The first such agreement precluded him from working at a competitor for two years, which Marx did not realize was an unusually long time.

"I got into work and they said: 'Here's your 401K, a bunch of other stuff and this contract,'" he recalled. "I said 'Oh, OK. I guess I have to sign this; I've turned down all of my other job offers.'"

In part because of his own experiences, Marx studied labor contracts and found that half of non-compete agreements are pushed onto employees after they start working, rather than as part of the job offer. And only 13% of workers have a lawyer review labor contracts before signing.

Zoia, of Glocap, said many workers don't negotiate work contracts in order to avoid awkward conversations.

"It's like a prenuptial agreement," he explained. "Companies are like: 'Hey, you haven't even gotten here yet and you want to talk about leaving?'"

Lawmakers, however, are starting to act in their stead. In response to recent lawsuits and the dismal job market, a number of states are weighing legislation to weaken noncompetes, following the lead of California, which has a law that cancels any contract restricting a person's right to work.

Early last year, Oregon lawmakers passed a proposal requiring employers to present labor contracts a few days prior to a new employee's first day.

Most recently, Massachusetts lawmakers drafted a proposal to ban noncompetes.

Tim Rowe, founder and CEO of the Cambridge Innovation Center, an incubator for tech startups near Harvard, argues that such arrangements hamstring the economy by keeping workers from realizing their full potential.

"I liken the situation to a high-school dance," Rowe said. "We have a law that says that after you've danced with someone, you've got to leave the dance for an hour. If you're a computer games guy, you can't just go write software for a hospital and realize your full potential."

Rowe's opinion, born from his career as an entrepreneur, is buttressed by new research. A Harvard Business School study published in June found that Michigan professionals changed jobs 8% less often after the state stripped its ban on noncompetes in 1985. The most specialized workers moved 15% less often than they previously had.

The old saying about moving on in order to move up was rendered moot for many of those Michigan workers.

Marx, who co-authored the report, said that workers tend to honor non-compete windows even when the contracts would not stand up in court. Although many judges "blue pencil" overly onerous labor contracts, stripping restrictions, individuals want to be "good citizens."

"More often than not, I've seen contracts say 'This is enforceable regardless of your reason for leaving the firm,'" he said. "In other words, 'Even if we fire you, we can enforce this.' ...In this kind of economy, you have to wonder if that's the right combination."


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