The use (and misuse) of Noncompete Agreements

By Professor Haifeng WANG

Few employment experiences stir such mixed emotions as garden leave, a period when an employee leaving a firm remains on the payroll but is barred from starting a new role, often under the terms of a noncompete agreement (“NCA”). On the surface, being paid to stay home sounds idyllic, a rare pause in the rush of working life. However, for many professionals, this contractually enforced idleness can feel more like exile than rest, particularly when it drags on for months or even years.

Companies that use NCAs argue they are essential to protect intellectual property, client relationships, and strategic know-how. By limiting where former employees can work, firms hope to prevent the leakage of confidential information and preserve their competitive advantages. But if NCAs are so valuable and seemingly costless for firms to use, why do many firms—even in industries where they’re standard—choose not to adopt them?

New research[1] offers an answer. Drawing on a large-scale survey conducted with PayScale, a U.S. compensation analytics firm, the authors examined how reliance on human capital and firm position in the industry shapes the use of NCAs across industries.

Their findings reveal a clear pattern: firms that see talent as their main edge—and aren’t industry leaders—are far less likely to use NCAs. For them, the trade-off is clear. NCAs make it harder to hire the technical talent they need to grow, especially since they have less proprietary knowledge to protect and bargaining power to exert than industry leaders. Data show that firms opting out of NCAs fill high-skill roles more easily than peers that rely on them, suggesting NCAs penalize challengers more than incumbents. The pattern is strongest in sectors where patents matter less, underscoring that when ideas move faster than legal protections, agility and culture matter more than control.

The authors call this “strategic restraint”, or a conscious choice by some firms to compete through culture, opportunity, and reputation rather than legal constraint. This approach helps attract top performers who value autonomy and collaboration, qualities that are particularly critical in sectors such as architecture, engineering, and marketing, where expertise and creativity drive performance. For these firms, strategic restraint itself becomes a signal: we trust our people to stay because they want to, not because they have to.

The takeaway for executives is clear: in knowledge-intensive industries, trust, transparency, and culture often do more to attract and retain talent than any legal clause. The data bear this out, as firms that forego NCAs in favor of openness report higher employee satisfaction and stronger communication between workers and managers.

So, for prospective employees, the next time a garden-leave clause appears in an offer letter featuring an NCA, think carefully. It may say as much about the company’s position, culture, and competitive choice as its compensation plan!

Reference:

[1]  Ganco, M., Liu, J., Wang, H., & Yamaguchi, S. (2024). Strategic restraint: When do human capital-intensive companies choose (not) to use noncompete agreements? Strategic Management Journal, 45(13), 2696–2726. https://doi.org/10.1002/smj.3648