State enforceability of noncompete agreements: Regulations that stifle productivity!

State enforceability of noncompete agreements: Regulations that stifle productivity! Noncompete agreements (also known as covenants not to compete [CNCs]) are frequently used by many businesses in an attempt to maintain their competitive advantage by safeguarding their human capital and the associated business secrets. Although the choice of whether to include CNCs in employment contracts is made by firms, the real extent of their restrictiveness is determined by the state laws. In this article, we explore the effect of state‐level CNC enforceability on firm productivity. We assert that an increase in state level CNC enforceability is detrimental to firm productivity, and this relationship becomes stronger as comparable job opportunities become more concentrated in a firm's home state. On the other hand, this negative relationship is weakened as employee compensation tends to become more long‐term oriented. Results based on hierarchical linear modeling analysis of 21,134 firm‐year observations for 3,027 unique firms supported all three hypotheses. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Human Resource Management Wiley

State enforceability of noncompete agreements: Regulations that stifle productivity!

State enforceability of noncompete agreements: Regulations that stifle productivity!

INTRODUCTIONAll organizations operate within the realm of their external environment from which they draw their inputs and into which they release their outputs (Miles, Snow, & Pfeffer, ; Scott, ; Starbuck, ). The external environment of an organization consists of a wide range of exogenous factors such as government laws and regulations, societal culture, and general economic conditions (Duncan, ) that shape organizational effectiveness through their influence on the organization's ability to acquire, use, and retain resources needed for value creation (Aldrich, ; Pfeffer & Salancik, ). One of the most important resources needed for value creation in contemporary businesses is human capital—a unique form of capital arising from the skills and attributes embodied in the workforce (Becker, ). As the U.S. economy has gradually evolved from a labor‐based economy to primarily a knowledge‐based economy, firms have become increasingly reliant on human capital to develop and sustain their competitive advantages (Barney, ; Bishara, ). However, despite its huge reliance on human capital a firm cannot fully control this resource as it is completely contained within the workforce. Firms often try to shield themselves from losing human capital by incorporating a noncompete agreement or covenant not to compete (CNC) into employment contracts. CNC refers to a restrictive clause in the employment contract, which forbids an employee from competing with the former employer either by taking up employment with a competing firm or by setting up a new start‐up within a certain geographic area within a certain length of time (Bishara, Martin, & Thomas, ; Estlund, ; Malsberger, ; Whitmore, ). Though inclusion of CNCs in employment contracts is the purview of a firm, their enforceability is determined by state labor laws that are a part of the firm's external legal environment. State labor laws thus influence one of the most important inputs needed by...
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Publisher
Wiley
Copyright
© 2018 Wiley Periodicals, Inc.
ISSN
0090-4848
eISSN
1099-050X
D.O.I.
10.1002/hrm.21840
Publisher site
See Article on Publisher Site

Abstract

Noncompete agreements (also known as covenants not to compete [CNCs]) are frequently used by many businesses in an attempt to maintain their competitive advantage by safeguarding their human capital and the associated business secrets. Although the choice of whether to include CNCs in employment contracts is made by firms, the real extent of their restrictiveness is determined by the state laws. In this article, we explore the effect of state‐level CNC enforceability on firm productivity. We assert that an increase in state level CNC enforceability is detrimental to firm productivity, and this relationship becomes stronger as comparable job opportunities become more concentrated in a firm's home state. On the other hand, this negative relationship is weakened as employee compensation tends to become more long‐term oriented. Results based on hierarchical linear modeling analysis of 21,134 firm‐year observations for 3,027 unique firms supported all three hypotheses.

Journal

Human Resource ManagementWiley

Published: Jan 1, 2018

Keywords: ; ; ;

References

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