State Sen. Paul Farrow (R-Pewaukee) recently authored legislation that would significantly change employer-employee non-compete agreements.
The proposed Senate Bill 69 overhauls the relationship between Wisconsin employers and their employees, making it much harder for an employee to change jobs. This is not only bad for employees; it is arguably bad for the Wisconsin economy.
Nicole Druckrey does a great job of summarizing the potential changes to the law in a recent BizTimes Blog.
As owners of a small but growing firm, we think this legislation would damage small businesses in Wisconsin and further consolidate power to a few large companies. We are passionate about this issue because we believe in competition, and we’ve also had firsthand experience with non-compete challenges.
Our West Allis-based accounting and consulting firm, founded in 2012, has grown from 4 to 20 employees. We are a net positive for Wisconsin because we attract many clients from across the Midwest rather than simply cannibalizing our local competitors. And part of our service is to advise clients on recruitment of their own talent.
Attracting qualified talent is fundamental to both our clients’ and our own firm’s success. A good candidate for us is usually someone who has spent time working at a larger firm in our industry. There’s a strong chance that this person will have a non-compete agreement regardless of the position they hold – a staff accountant is bound by the same restrictions as a partner-level professional.
Even if we do everything that we can to ensure our new employee honors their agreement there is no doubt in our mind that we will be sued if any of their old clients (or even clients of their former firm) want to follow our new colleague to our business. So not only does the new employee have a non-compete with their old firm by default we do as well.
Even with existing laws in Wisconsin, this is limiting because the employee usually decides to stay at their current firm to avoid litigation. Imagine their reluctance to change firms if the law changes. As a firm we are always asking ourselves, “If we hire this person will we get sued?” or “Do we just not take ANY clients from that firm regardless of the clients’ choice to avoid costly litigation?” Instead, we should be asking ourselves if this person is a good fit for our firm.
It is possible to challenge this in court. But litigation isn’t always about who’s right, it’s about who has the deeper pockets to prove they are right. The new legislation even goes so far as to limit what judges can rule on regarding these agreements. The judiciary in Wisconsin has historically been sympathetic to employees in these disputes.
Even if we do everything right with regards to a non-compete, the cost of defending ourselves is enormous. This is money that could be better used expanding our business. At least with the old law, a firm like ours might be willing to fight the good fight, but with the new legislation a legal battle would be inadvisable.
An October 2014 article in The Atlantic magazine examined how more stringent non-compete agreements are ultimately anti-competitive and favor large companies over startups. The article makes several points that the Wisconsin legislature needs to consider if we are to remain a “growth” state:
• States with stringent non-compete laws are unfriendly to highly skilled workers. Not only do their job opportunities become limited, but a UCLA study (“Ties the Truly Bind: Non-competition Agreements, Executive Compensation and Firm Investment,” Mark J. Garmaise) found that those workers earn less.
• Companies from lax non-compete states (e.g., California) are loathe to establish offices in states where those agreements are strictly in force (e.g., Massachusetts).
• Another study found that inventors tend to migrate to states that do not enforce non-compete agreements, leading to a brain drain.
In other words, this proposed Wisconsin law will stifle the growth of firms like ours, and our clients, and discourage other people from starting their own business throughout the state. Younger people will have signed non-competes that will make it harder to go off on their own. Fewer people getting into business means consumers will have fewer choices for services. Not only are employees restricted, but consumers will be as well.
That’s not what a competitive, growing economy in Wisconsin should be about. We can do better – with laws that promote startups, innovators and competitive products and services.
Michael Bark, CPA/CVA/MST, and Andy Lehmkuhl are principals and founders of Edge Advisors LLC, a West Allis-based accounting and consulting firm.
