CAMBRIDGE, Mass., April 21, 2010 226128148 Non-compete contracts, which bar employees from working for a competitor after they leave a job, have a disproportionate effect on specialized high tech workers, MIT Sloan Assistant Professor Matt Marx has found in his research.
In a study of employment trends in Michigan before and after a ban on non-compete contracts was repealed, Marx and two other researchers found that specialized technical workers were two times less likely to change jobs as other technical workers after the ban was lifted.
"If you are highly specialized in your field, there are probably not that many companies interested in you outside of your company and its direct competitors," Marx says.
The findings have important implications for states and regions looking to attract high tech industries, according to Marx.
"If a state enforces non-competes strictly, it is not going to have the circulation of talent and ideas that you need for these clusters to thrive," Marx says.
Non-compete agreements can discourage spin-off businesses226128148a key ingredient in successful high tech clusters226128148and they can cause a brain drain, as skilled workers seek employment in states where non-competes are banned, according to Marx.
Employers in many industries ask workers to sign non-compete agreements to prevent employees from defecting to a rival, taking trade secrets, accounts, and customers with them.
In the United States, laws regarding non-compete agreements vary widely. In most states, the agreements are legal with some restrictions. Several states closely regulate non-competes, and California bans them entirely. With the recession and jobless recovery severely limiting employment opportunities, state laws on non-competes are under increased scrutiny today.
For nearly 75 years, Michigan banned non-compete contracts. Then, in 1985, the state legislature inadvertently repealed the law when it was overhauling antitrust legislation. Corporate lawyers apparently got the word out to their clients.
Marx and researchers Lee Fleming of Harvard Business School and Deborah Strumsky of the University of North Carolina-Charlotte compiled information in Michigan patent filings, which include the employment history of individual filers.
By studying over 40 years of data, the researchers were able to capture the effect of the change in the law on advanced industries. The study controlled for individuals working in the volatile auto industry.
The study also found that job changing slowed generally in Michigan after non-compete agreements were legalized, which the researchers expected. "That's what the agreements are designed to do," Marx says.
Marx says he has done preliminary research with Jasjit Singh of INSEAD Singapore suggesting that non-compete agreements are a factor in where highly skilled individuals decide to seek work. "They'll leave Massachusetts, which allows non-competes, and go to a company in California, where they don't have to worry about them," he says. "That can be a problem for Massachusetts, which obviously wants to retain its skilled workers."
In another study, Marx surveyed a thousand engineers attending a conference of the Institute of Electrical and Electronics Engineers about their experience with non-compete contracts.
More than 70 percent discovered only after they had accepted a job offer that they would have to sign the contracts, and 25 percent said they learned of the contracts on their first day of work.
"What can you do? Sometimes you've just moved your family across the country," he says.
Younger workers are affected most by these tactics, according to Marx. "They're much less likely to fight it or say, no, and about half of them say they felt it was non-negotiable."