Keith Bollinger worked in textile finishing in North Carolina and was initially excited when he found a similar but better position at another company following the financial crisis. But then his former employer sued him for violating a noncompete agreement with the employer’s predecessor, which specified that he couldn’t work for a competitor for 2 years across 18 states. He depleted the family savings, relying on credit cards and loans from family and friends, but he still couldn’t afford to keep up with the legal fees needed to defend himself.
“I was just a working stiff who worked diligently to get ahead in life, and when an opportunity came for me to provide a better life for my family, it was yanked out from under me,” he testified before the Senate in November, recounting the damage a noncompete visited on him. He said the position he had been offered was ultimately filled by someone else while he was still in court, and he eventually ended up working at the new company in a lesser, lower-paid capacity.
All of us should be concerned about the rampant growth of noncompetes and how they are hampering the freedom of workers and the economy. Why? For one thing, basic fairness.
“I’m now making about what I did 20 years ago,” Bollinger told the Committee on Small Business and Entrepreneurship. “Honestly, I don’t think that I’ll ever fully recover from it, and neither will my family.”
Noncompete agreements — which typically prohibit an employee from working for a competitor within a certain field and geographic locale, often for 1 to 2 years — were once reserved for high-ranking executives and people who knew highly guarded trade secrets. But in recent years, they began to be imposed willy-nilly on all kinds of workers: medical technicians and dog walkers, journalists and janitors. With little fanfare, modern-day employers have been reinstating an expectation of servitude that should have disappeared long ago.
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Thankfully, a bipartisan pair of senators is pushing legislation that would prohibit noncompete agreements in almost all situations. The Federal Trade Commission is also considering a petition to ban or otherwise limit noncompetes under its ability to enforce existing antitrust protections. The commission heard testimony from experts Thursday and is welcoming comments from the public through Feb. 10. Individuals have already begun to weigh in; one wrote: “I have a noncompete contract that is following me like a frightening shadow.”
All of us should be concerned about the rampant growth of noncompetes and how they are hampering the freedom of workers and the economy. Why? For one thing, basic fairness: Just because you work for a company now doesn’t mean it should be able to lock you into that job; people should be able to advance in their lives and careers.
It’s also fundamentally imbalanced. In our system of predominantly “at-will” employment, an employer can terminate or replace workers pretty much at will (unless they’re discriminating or retaliating against them), but workers subject to noncompetes can’t realistically do so. Noncompetes can even force people to stay in workplaces where they are being harassed, underpaid or experiencing other legal violations.
Additionally, noncompetes reduce workers’ wages and job mobility: If you can’t get another job in your field, it’s difficult to bargain for higher wages where you are. A recent study found that banning noncompetes for low-wage workers in Oregon increased hourly wages and job mobility. Another study in the fall came to the same conclusion, additionally finding that noncompetes increased racial and gender wage gaps.
Using noncompetes has negative consequences for businesses, as well. They are bad for economic dynamism, making it hard for employers to hire their choice candidates and for entrepreneurs to leave a job to start their own company. One often-cited legal scholar attributes Silicon Valley’s great success to the fact that California courts won’t enforce noncompetes.
Moreover, the term “agreements” is something of a misnomer; people often must sign noncompetes after they’ve already accepted or started a job. Sometimes, people don’t even know they’ve signed a noncompete since it’s just a sentence or two in a pile of onboarding paperwork.
Unfortunately, the practice is more widespread than ever. An Economic Policy Institute study in December revealed that nearly half of businesses surveyed required noncompete agreements for at least some employees. Nearly a third of the employers sampled required all employees to sign noncompetes. Noncompetes were also used for all workers in more than a fourth of companies with an average wage below $13 per hour.
While the American workforce awaits federal action, states have increasingly begun to take matters into their own hands. At least 10 states, mostly on the East and West coasts, have passed laws limiting noncompetes in the past severalyears. It’s important, however, that laws ban noncompetes entirely, not merely declare them unenforceable as in California. This may seem like a wonky distinction, but it matters: If companies face the actual threat of penalties for imposing noncompetes, there’s a much stronger incentive to follow the law rather than if the courts simply will decline to enforce them.
Using noncompetes has negative consequences for businesses, as well. They are bad for economic dynamism, making it hard for employers to hire their choice candidates.
Supporters of noncompetes argue that they encourage employers to invest in training for their workforce, but there is little evidence to support this notion. They also argue that noncompetes allow businesses to protect their trade secrets, but most of those subject to noncompetes don’t have access to them — and nondisclosure agreements work just as well.
A policy that raises wages, increases job mobility and entrepreneurialism, and costs almost nothing? That promotes the basic American concept that people should be able to work hard and seek a better life? This should be a no-brainer. The FTC’s very mission is preventing anti-competitive business practices; what could be more anti-competitive than something called a noncompete? The FTC, Congress and state governments all have the power to fix this problem — and we can and should demand they take action.