America’s the place where if you dream of starting a business, you should be able to do so, right? If you have the skills and the money, you should be able to make your entrepreneurial dreams come true.
But in many states, a former employer can keep you from starting your own business.
Crazy, right? Now there’s a chance to stop that – and you can do something to help.
Six months ago, when someone asked me what I’d like the new administration and Congress do to help small businesses, one of the things on my wish list was to “end non-compete agreements.” Now, President Joe Biden has proposed doing just that in one plank of his sweeping Executive Order on Promoting Competition in the American Economy.
The rate of new business formation in the United States dropped by 50% since the 1970s, according to a 2017 report by the Economic Innovation Group. There are many reasons for this decline, but certainly one factor that’s received little attention has been the explosion of noncompete agreements.
Noncompetes are documents that an employer can force a new hire to sign agreeing to not compete against that company if they leave their job. About half of private U.S. businesses require employees to sign such agreements, the Economic Policy Institute found in a 2019 study.
In many situations, it’s not unreasonable for an employer to require employees to sign something that will protect the business, and these should remain legal.
For example, it makes sense for an employer to require a nondisclosure agreement that keeps employees from sharing critical details about their company, such as their financial details and customer records.
It’s also reasonable to keep a current employee from being able to leave and take trade secrets – such as secret recipes at a restaurant, software code in a tech company, or innovative and unique manufacturing techniques.
It’s even fair that a business makes you sign something that says that, if you start your own business, you can’t solicit existing customers or recruit employees to come over to your new business. And it certainly makes sense that if you sell your business, as part of the contract, you could agree to refrain from competition with the new owner for a period of time.
But in many other cases, the point of a noncompete is just to eliminate healthy, fair competition. For example, in many states, the following situations would be perfectly legal:
Kai is a new hairdresser working in Jaden’s salon. Kai has worked there a year, learned a lot, but is itching to own their own business and launch “Kai’s Kuts” salon. In many states, a noncompete agreement can keep Kai from opening – or even working in – another salon for a significant period of time, which might be as much as two years. In some states, Kai could actually be forced to pay their current owner back for training they received.
Pat has been a line cook at a fast food restaurant. The restaurant serves burgers and fries, but Pat has been taking culinary classes. Now Pat and a buddy, Chris, want to start a pizzeria, Pat’s Pies. Unfortunately for Pat, in many states, Pat cannot start another food business – in fact, cannot even work for Chris – if their former employer made them sign a non-compete.
Courts are increasingly throwing out these agreements, but they can still have a “chilling effect” by keeping people from starting their own businesses because they are afraid of the cost and stress of litigation, even if they might eventually win in court.
And if you own a small business and have such an agreement – or are thinking of adding one – you should prepare to end up in court one day when a former employee challenges you.
Only a handful of states prohibit noncompete agreements. California, for instance, prohibits virtually all noncompetes (although a company can protect trade secrets), so it’s not surprising that the Golden State is one of the most entrepreneurial in the country.
Unfairly stifling competition is not the American way. It’s not good for communities, the economy or the health of small business. It’s also bad for customers, who get fewer choices and often pay more for worse service or products.
President Biden’s executive order, signed July 9, has tried to reduce noncompetes, but it will take congressional and state action to have broad and lasting effect.
So, if you’ve ever wanted to start your own business, or you just believe that there should be a level playing field for competition, write your congressperson, senator, and state representative saying you want unfair noncompete agreements eliminated in your state.
Free and fair competition: That’s the American way.
This article originally appeared on USA TODAY: Non-compete agreements: What entrepreneurs need to know