In 2013, Ed Pileggi left a software engineering role in San Diego for a lucrative consulting position with Hawaiian Airlines in Honolulu. With the new opportunity came a higher salary and a chance for professional development.
What Pileggi did not realise was that, in signing a contract with the third-party staffing agency that secured him the job, he had agreed to a “non-compete clause” that would effectively prevent him from taking any other software development work on the island. The clause applied not only during the term of the contract, but also for up to a year after it ended.
Such a clause meant little to him as a former resident of California, where non-competes are not recognised under state law. “I signed the contract coming from California, and I didn’t think twice,” Pileggi says.
His experience reflects a broader debate on employment law under way, especially in the US where established corporate interests and lobbyists for the entrepreneurial sector are battling each other.
According to a recent White House report, nearly a fifth of US workers are bound by non-compete agreements – meaning the clauses are either within their existing employment contracts or they continue to be bound by them after leaving jobs, though enforceability varies by region.
In Massachusetts, a group of employees of EMC, a technology company, have joined a union set up to eliminate non-compete agreements in EMC employment contracts. Under the name Earn-Tee, the group hopes to take advantage of a planned takeover by Dell to bring attention to their cause.
Competitive environment
Those in Massachusetts who oppose non-compete agreements argue that the clauses hold the state back from achieving the technological innovation and competitive environment found in Silicon Valley.
“The free flow of talent equals the free flow of ideas,” says Ari Glantz of the New England Venture Capital Association, which lobbies for reform. “Innovation relies on that mobility of information and brain power.”
The state is trying to address such concerns but any action on a final reform bill has been delayed until 2017.
For Pileggi, it was not until he started thinking about his next move and cut ties with the employment agency that he realised his non-compete clause could be enforced. SCube, the Michigan-based staffing agency through which he landed the Hawaiian Airlines job, had imposed a broad non-compete agreement in his contract that included working for clients – as well as clients of clients.
Sreenivas Oruganti, owner of SCube, says non-compete clauses are crucial for small businesses like his.
“I spend time, money and resources developing relationships with clients . . . To recoup that would take some time for us.”
But for Pileggi, the clause left him with limited options: “There were so few IT jobs on the island. If you wanted to leave your job you’d have to go to the mainland.”
Instead, he joined a colleague and fellow consultant, Jeff Hong, who with a larger group of workers was lobbying the Hawaiian state legislature to reform the enforceability of non-compete clauses. Together, they managed to get a bill passed in 2015 that created an exemption for IT workers.
Cripple innovation
Employment lawyers are divided on the problem of non-compete clauses. On one hand, the agreements can protect a company’s trade secrets. But opponents say they stifle the flow of talent, crippling innovation and shifting bargaining power to the employer.
“Whether they’re enforceable isn’t the issue, because just the cost of getting to that answer can be prohibitive for anyone who is a low and even average wage worker,” says Douglas Wigdor, an employment lawyer.
Wigdor points to other practices, such as non-solicitation and "gardening leave" agreements – in which employees stop work but continue to be paid – that could be used instead.
The use of non-compete agreements has expanded beyond contracts for high-skilled tech workers and high-paid executives. The White House reports that 14 per cent of people earning less than $40,000 are subject to non-compete agreements.
Fast food workers, camp counsellors and salon workers are among those who have voiced concern.
In June, Eric Schneiderman, the New York State attorney-general, settled a case with Jimmy John’s, a sandwich chain, calling non-compete agreements for low-wage workers “unconscionable”. The company had been including non-compete clauses in the hiring documents sent to franchisees.
Meanwhile, in Hawaii, the ban on non-compete clauses for tech workers is taking hold. “People are becoming better aware of their rights,” Pileggi says of fellow tech workers on the island.
– Copyright The Financial Times Limited 2016
