Between 28% and 47% of all private sector workers are subject to noncompete agreements according to an Economic Policy Institute report. Noncompete agreements (or noncompetes) are provisions in an employment contract banning workers from leaving their job to work for a “competitor” that operates in the same geographic area for a given period of time. In a way, noncompetes are an attempt to recreate the power dynamics of the employer-dominated company towns of old — with workers unable to change employers if they want to continue working in the same industry.
It is not just top executives who are forced to accept a noncompete agreement. Companies also use them to restrict the employment freedom of many low-wage workers, including janitors, security guards, fast food workers, warehouse workers, personal care aides and room cleaners.
As for the impact of these agreements, a number of studies have found that noncompetes lower wages for all workers, even those not subject to noncompetes. And then there is this from CBS News in July:
“In the context of the pandemic, which caused millions of people to be laid off, it’s safe to say at least a share of those workers are constrained [by noncompetes] in pursuing other opportunities during this crisis,” said John Lettieri, head of the Economic Innovation Group, a think tank that advocates against noncompetes.
Also in July, President Joe Biden signed an executive order on “Promoting Competition in the American Economy” that, among other things, called upon the Chair of the Federal Trade Commission (FTC) to work “with the rest of the Commission . . . to curtail the unfair use of (noncompete) clauses and other clauses or agreements that may unfairly limit worker mobility.” While it seems likely the FTC will take some action, the scope of that action is uncertain.
Noncompetes and their use
There are no federal rules governing noncompetes. It is up to the states to decide how to regulate their use. California, North Dakota and Oklahoma are the only states with outright bans on their use; Washington D.C. also outlaws them. Several states have placed limits on their use. Illinois, Maryland, Nevada, Oregon and Virginia all prohibit the use of noncompetes with low-wage hourly workers. Washington state banned noncompetes for those earning under $100,000 per year. Hawaii has prohibited noncompetes for tech workers only. On the other hand, there are some states, like Idaho, which have actually passed laws making it easier for companies to enforce noncompete agreements.
Most workers live in states where there are few if any restrictions on the use of noncompete agreements. A national survey that included firms with at least 50 employees found that although “the use of noncompetes tends to be higher for higher-wage workplaces than lower-wage workplaces . . . it is striking that more than a quarter — 29.0% — of responding establishments where the average wage is less than $13.00 (an hour) use noncompetes for all their workers.”
Popular outrage has sometimes succeeded in pushing state authorities to intervene on behalf of workers. For example, in 2016, the attorneys general of New York and Illinois, reacting to public anger, forced sandwich chain Jimmy John’s to stop its franchises from using noncompetes that forbid its employees from working at any other sandwich shop within a three-mile radius of the franchise for a period of two years.
The cost of noncompetes to workers
When noncompetes are banned, worker pay rises. One of the most detailed studies demonstrating this draws on data from Oregon’s 2008 decision to ban the use of noncompetes for low-paid hourly wage workers. As the authors of the study explain:
“We find that banning NCAs (noncompete agreements) for hourly workers increased hourly wages by 2-3% on average. Since only a subset of workers sign NCAs, scaling this estimate by the prevalence of NCA use in the hourly-paid population suggests that the effect on employees actually bound by NCAs may be as great as 14-21%, though the true effect is likely lower due to labor market spillovers onto those not bound by NCAs. While the positive wage effects are found across the age, education and wage distributions, they are stronger for female workers and in occupations where NCAs are more common.”
Studies of changes in the use of noncompetes in other states have produced similar results. For example, a study of Hawaii’s 2015 decision to ban noncompetes for tech workers showed a 4.2% pay increase for new hires and a 12% increase in worker mobility.
Unfortunately, even a change in law doesn’t necessarily bring an end to the practice. California courts will not enforce a noncompete contract, but that hasn’t stopped many California businesses from including them in their employment contracts. One big reason, according to worker advocates, is that most workers don’t know noncompetes are banned in California.
Possible federal action
President Biden pledged during his campaign to “eliminate all (noncompete) agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.” On the other hand, his July executive order speaks to “curtailing” their use. The best outcome would be an FTC ban on the use of noncompetes for all workers; noncompetes are just another tool that businesses can use to exploit their workers.
It may be the FTC will instead seek to place limits on the use of such agreements, perhaps outlawing their use with low-wage workers or establishing federal regulations that restrict their scope and duration. Although such an action would be an improvement over the current situation, where most states do little to restrict the use of noncompetes, it would likely result in an unsatisfying and confusing patchwork of regulations.
No matter how the FTC rules on the use of noncompete agreements, there are two other actions it should take that would significantly strengthen worker rights. Currently, many workers only learn they are subject to a noncompete agreement after they have already accepted a job. The FTC should mandate that employers include any noncompete requirements in all job postings.
And as the California experience shows, companies will continue to use noncompetes even if they are not enforceable, relying on ignorance, intimidation, as well as the financial costs of court proceedings, to get workers to accept their terms. Therefore, the FTC should also allow workers to sue for damages if a business is illegally attempting to enforce a noncompete agreement.
In the meantime, while we await FTC action, the greater the public knowledge about, and voiced opposition to the use of noncompetes, the better it will be for all workers.
Martin Hart-Landsberg is a professor emeritus of economics at Lewis & Clark College. Street Smart Economics is a periodic series written for Street Roots by professors emeriti in economics.