Non-Compete Agreements Are Typically Harmful to Workers

Recent surveys show that non-competes tend to reduce both wages and worker mobility. This data has led several state legislatures to pass bills restricting non-competes.

Why this matters
Many policy makers are still unaware that low-wage workers such as those in fast-food establishments are often asked to sign non-competes as a condition of employment.

The Takeaway
Non-competes make sense in some industries such as tech where they can induce companies to invest more in employee training. But they pose an unfair burden on low-wage workers.

In Depth

The Turning Tide on Legally Enforceable Non-Competes
Since the beginning of 2017, legislators in about a half dozen states, including Maryland, Massachusetts and New York, have been considering bills that would restrict non-compete agreements. This wave of activity follows on the heels of new non-compete laws that were passed in several other states last year, including Connecticut, New Hampshire, Illinois, Rhode Island and Utah. “Recent research shows that the enforceability of non-compete often hurt employees by reducing both their wages and mobility, and these effects are now increasingly understood by policy makers,” says Evan Starr,(University of Maryland). Non-competes have become a national issue, argues Starr, because they are such strong prohibitions on the within-industry movement of workers and because they are just now being found in low-skill, low-wage jobs such as unpaid interns and minimum wage sandwich makers.

Starr himself has been instrumental in bringing this issue to the forefront. In 2014, along with two colleagues at the University of Michigan, Norman Bishara and J. J Prescott, Starr conducted the first nationwide survey of non-compete agreements. Funded by the University of Michigan and the Kaufmann Foundation, the 2014 Non-compete Survey Project analyzed the responses of 11,500 labor force participants across the nation. “Before our survey, there was almost no data—except for a few small surveys of executives, physicians and electrical engineers—on who signs these contracts,” observes Starr. Starr’s research caught the attention of key officials in the Obama administration and in May of 2016, the White House released a reported based on the data from the 2014 survey, “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses.” And last fall, shortly before the election, the White House formally endorsed the various new bills before state legislators that are designed to curb non-competes.

Why Non-Competes Hurt Employees More
Starr’s 2014 survey revealed that over 50% of employees view their non-compete as a barrier to mobility; in fact, over 40% cited a non-compete as a reason for turning down a job offer. Another key finding was that non-competes are far from rare among low-wage workers. While 39% of those with at least a Bachelor’s degree and earning more than $100k sign non-competes, 12% of those without a Bachelor’s degree and earning less than $40k a year still sign. Overall, about 20% of American workers are bound by non-competes “There are lots of startling examples of non-competes among low wage workers,” says Starr. “For example, Amazon insisted that temporarily employed packers sign a non-compete that they would not work for another company that directly competes with Amazon for 18 months. But since the world’s largest retailer competes with just about every other company, that stipulation drastically curtailed the ability of these workers to find any other job.”

Eliminating non-competes for low-wage workers has been a central objective of several of these new state initiatives such as the new bill introduced by Maryland legislators in January would outlaw non-compete agreements for workers who earn $15 and hour or less. This bill is similar to the one passed in Illinois last year, which banned non-competes for workers earning $13 an hour or less. In contrast, other states laws have been focusing on other types of workers. For example, the new state laws passed in Rhode Island and Connecticut in 2016 aimed to protect physicians from the burden of non-competes.
At present, there remains a great deal of variability among states in the enforceability of non-competes. In several states including California, these agreements are rarely enforceable. “But while this limitation is well known by workers in the tech industry, younger and less skilled workers are often intimated by non-competes and may still turn down new job opportunities out of fear of retaliation,” notes Starr.

Starr highlights that there are also some legitimate reasons for non-compete agreements. Non-competes sometimes induce employers to invest more in human capital. According to the 2014 Non-compete Survey Project, non-competes are associated with a 5-percentage point increase in the likelihood of receiving training. Perhaps their real value, according to Starr, is that “they can protect companies from losing clients and trade secrets when employees jump to a competitor.”

Dig Deeper

Employers use non-compete agreements even for low-wage workers, Baltimore Sun, July 7, 2017

How Noncompete Clauses Keep Workers Locked In, NY Times, June 9, 2017

The Unfreeing of American Workers NY Times, May 22, 2017

Companies Compete but Won’t Let Their Workers Do the Same, NY Times, May 4, 2017

Non-compete Contracts: Economic Effects and Policy Implications, Office of Economic Policy U.S. Department of the Treasury, March 2016

Joshua Kendall has written on business and healthcare for numerous publications including BusinessWeek, Fortune.com, The New York Times, The Boston Globe and The Washington Post. For more about his work visit JoshuaCKendall.com.