Ban corporate “non-compete” agreements that trap low-wage workers

A newly emerging issue is on the radars of pro-worker advocates, corporate accountability watchdogs, and economists: the growing exploitation of non-compete agreements to further tilt the labor market against rank-and-file workers.

As recent exposés of Amazon and sandwich chain Jimmy John’s have brought to light, non-compete agreements are no longer limited to highly-compensated elite professionals in technology, finance, or law. These contractual provisions, which delay an employee’s ability to work for competitor firms, are spreading to a wide range of occupations—including low wage jobs like warehouse laborer, sandwich maker, and even summer camp counselor.

noncompete-agreements-low-wage-workersNon-competes can serve legitimate business purposes, such as enticing companies to invest in their workers with advanced training and to share proprietary information with them. The low wage and service industry workers increasingly ensnared by the practice, however, are unlikely to hold the kind of high-level trade secrets that non-compete agreements are meant to protect. Many state laws also already prohibit the theft or unauthorized disclosure of trade secrets.

From the perspective of, say, a sandwich shop waitress, it’s easy to see why her boss at corporate headquarters would nonetheless find a non-compete agreement appealing. If the job contract’s fine print forbids her from working at other eateries in her entire home city for several years, how could she credibly threaten to quit to seek better wages, training, and working conditions?

The short answer is that she can’t. That’s the point. The unavoidable conclusion is that employers are exploiting the labor practice to further kneecap workers’ negotiating power and future employment flexibility—locking them into bad low-wage jobs and depressing wages.

Such concerns are borne out in a recent Department of Treasury report. As it explains, non-competes are actually operating to depress wages—both at the start of employment, when well-informed workers who’d be willing to sign a non-compete would presumably get a bump in compensation in exchange (but don’t), and over the workers’ lifespans, when the extra job training supposedly encouraged by non-competes should translate into faster wage growth with age (but doesn’t).

Furthermore, 15% of workers without a four-year college degree and 14% of those making less than $40,000 are estimated to be subject to non-competes—although they are the types of workers for whom non-competes wouldn’t make sense for the conventional justifications.

Entire communities incur trade-offs as well, not just individual workers. When abusive non-compete agreements deter workers from moving around to other firms, sharing expertise, and launching their own start-ups, local innovation economies likely suffer as a result. Silicon Valley is often held out as a prime counter-example illustrating the broader public benefits of worker mobility, given that California is the rare state that does not enforce non-compete agreements. If titans of industry truly believed in market competition, they should get behind similar competition between firms outside California to recruit and hire talent.

In addition to their broader implications for innovation policy, it’s important to keep in mind that non-competes are on the rise at a time of extraordinary concentration of wealth and stagnant wages for most Americans. A key cause: the American labor market is stacked in favor of powerful executives and investors. Remedying the pitfalls of non-competes would help counter this trend by enabling janitors and food servers to pursue better opportunities and higher wages elsewhere.

Quitting, in fact, is good; quitters are winners if those workers had the means to leave and prospective employers are competing for their talent instead of making employees beg for crumbs. (As a related matter, here’s another idea based on that very principle to expand eligibility for Unemployment Compensation to those who quit their jobs.)

In terms of policy solutions, several recommendations are now on the table, including the following from the Treasury Department report:

  • Increase transparency in the offering of non-competes, so that workers are made aware of the potential legal constraints on them before accepting a job offer and turning down other ones.
  • Encourage employers to use enforceable non-compete contracts, instead of over-broad provisions that intimidate and chill worker behavior.
  • Require that firms provide “consideration”—such as extra compensation or training—to workers bound by non-compete contracts in exchange for both signing and abiding by non-competes.

For a more straightforward proposal that’s also helping to clarify and shape the debate, Senators Chris Murphy (CT) and Al Franken (MN) have introduced legislation to ban non-compete agreements for workers paid less $15 per hour. The bill would inject more transparency into the practice as well, by requiring companies to disclose upfront whether job applicants will be asked to sign a non-compete agreement.

That threshold of $15 per hour or less under the legislation also sharpens the picture of which workers would benefit from greater protection against abusive non-competes. It’s well-established that women and people of color are over-represented in low wage work, but the following figures and data from the National Employment Law Project drive home the point. They also fill the ranks of service jobs, such as retail clerk and food server, that make exploitative non-competes especially difficult to justify on the basis of trade secrets, exclusive client lists, or sophisticated training as a worker benefit.

non-competes-15perhour-demographics-ratios

non-competes-15perhour-workforce-stats

Beyond federal legislation, what more could be done? The states could move forward with their own state-level legislation; California, for instance, does not enforce non-compete agreements at all. Federal contracting reform may also be useful leverage. Specifically, the current Administration and presidential candidates should explore whether federal contractors could be barred from imposing non-compete agreements on their low wage workers, plus required to be candid about the practice with other job seekers. The U.S. Senate and House of Representatives could follow suit with their own contracting vendors.

For more information, see “Non-compete Contracts: Economic Effects and Policy Implications,” Department of Treasury (March 2016); “Democrats Want To Ban Noncompete Agreements For Low-Wage Workers,” The Huffington Post; and “Job hopping helped Silicon Valley thrive. So why do other states restrict it?,” Vox. The law firm Beck Reed Riden LLP also provides a state-by-state guide to non-compete policies here.