najah a. farley is a senior staff attorney at the National Employment Law Project, a nonprofit advocacy group focusing on labor rights. This article does not necessarily reflect the views of NELP.
Published July 24, 2023
When you think of noncompete clauses in contracts (if you think of them at all), you probably imagine high-tech firms worried about guarding insider secrets or preventing senior execs from poaching top clients as they depart for more lucrative jobs. What you surely don’t ponder are noncompetes that prevent sandwich makers or gas station clerks from moving across the street to earn a couple bucks an hour more. But times are changing and noncompetes in labor contracts are now so pervasive that they represent a true threat to labor market efficiency and — more importantly — to social mobility.
Let’s back up a moment. A noncompetition agreement, also known as a noncompete, bars an employee or independent contractor from jumping to a competing employer or related business for a period following the termination of their work relationship.
Typically, noncompetes are imposed as a condition of promotion, or getting the job in the first place. Some agreements bar workers from taking jobs in a specific industry, while others bar them from working within a specific geographic region. Some are very broad, nixing employment in entire regions of the country. Some even blacklist work with specific competitors.
Where They Came From
Noncompete agreements have a long history — there’s a legal case in England dating back to 1414 in which a noncompete was an issue. But scholars locate the roots of the modern framework in a 1711 case that stated such restraints were void except when they were considered to give “fair protection to the interests of the party in favour of whom it is given and not so large as to interfere with the interests of the public.”
Many of the cases that formed the basis for modern law on noncompetes involved an apprentice or other worker in a skilled trade operating in the same area of their “master’s” business, such as a bakery. According to Catherine Fisk of the University of California, Berkeley, a scholar of the development of intellectual property and restrictive covenants, the core issue in the 19th century was whether employers could own ideas or knowledge that existed in the minds of their employees. Broadening the concept, U.S. jurisprudence in the 19th century sought to balance the “legitimate interests” of the employer with “the employee’s right or obligation to work with the public’s interest in free competition and in the fruits of everyone’s work.”
In many cases, it’s unclear whether contemporary noncompetes are enforceable under state laws, especially where workers seeking to change jobs plainly have no special knowledge or intellectual property to take with them.
Another contribution to the modern understanding of noncompetes — one that highlights their problematic origins — is an analysis by Ayesha Hardaway (Case Western Reserve University) comparing their use among low-wage workers today to the wage contracts common during the Reconstruction period in the American South. Hardaway discusses how, after slavery, an individual’s ability to contract was viewed as a symbol of freedom. However, those new rights were shortly turned on their head in the rollback of formerly enslaved people’s rights. Businesses began to use them to exploit the newly freed, espousing the philosophy that former slaves needed to be “taught that there are duties and privileges” to freedom. Black workers who chose not to complete the terms of their labor contract could be jailed.
In many cases, it’s unclear whether con temporary noncompetes are enforceable under state laws, especially where workers seeking to change jobs plainly have no special knowledge or intellectual property to take with them.
Indeed, in a landmark case back in 2015, New York State successfully challenged the requirement of the sandwich shop chain Jimmy John’s that departing employees agree not to work for competitors within two miles. But every state treats noncompetes differently. And the resulting uncertainty works to the disadvantage of employees who don’t have the practical ability to challenge them.
Workers who seek to get around noncompetes generally must dispute the agreements in court or risk being sued by their employer and having their new job offer revoked. The consequences are hardly as extreme as the jail time threatened during Reconstruction, but they still undermine workers’ agency and interfere with their ability to earn a living.
The history of noncompetes is fraught in part because it highlights the economic reality that a lack of regulation in most jurisdictions typically creates a sharp imbalance of power between employers and employees, which has deepened inequality. By the same token, rising inequality linked to a lack of individuals’ bargaining power has made the widespread usage of noncompetes even more objectionable.
Responding to calls for reform from organized labor, worker advocates and the Biden White House, the Federal Trade Commission has waded into the conflict. In January, it proposed a uniform, nationwide rule that would bar the imposition of noncompetes for most workers and require employers to rescind existing noncompetes not related to the sale of a business.
State of Play
Much of the recent attention to noncompetes, such as the high-profile Jimmy John’s case, has focused on workers in low-wage industries. Indeed, the idea of limiting the mobility of workers who plainly can’t abscond with intellectual property has been credited with bringing the issue to the forefront. The case triggered a wave of legislative reforms from Massachusetts to Colorado, restricting the enforceability of noncompetes. The new state laws took many forms, from Hawaii’s ban on noncompetes for certain fields to the District of Columbia’s ban for workers making under $150,000 (or $250,000 in medical fields).
The action wasn’t confined to the states. In 2014, President Obama commissioned a taskforce led by the Department of Treasury to study the issue. Their report found that some 28 million workers were bound by noncompete agreements. A subsequent study by the progressive policy nonprofit Economic Policy Institute, which surveyed the businesses themselves, put the figure at between 36 million and 60 million. EPI speculated that the Obama task force survey-based figure was so much lower because workers themselves often have no idea they have signed away their mobility in their employment contracts.
While progressives are more invested in the issue of banning noncompetes, a number of Republican senators have signed on. Senators Marco Rubio (R-Fla.) and Maggie Hassan (D-N.H.) introduced the Freedom to Compete Act, which would ban noncompetes for workers in low-wage industries who qualify as “nonexempt” under federal labor law — meaning workers who must be paid overtime. Senators Chris Murphy (D-Conn.) and Todd Young (R-Ind.), for their part, introduced the Workforce Mobility Act, which would eliminate noncompetes for the majority of workers, keeping them only for workers involved in the sale of a business. But neither has gained much attention (or traction).
Hence the significance of President Biden’s Executive Order on Competition directing federal agencies to take action on this issue. The FTC took up the cudgel, proposing a rule to ban noncompetes altogether, except in the sale of a business. Actually, the agency went further, proposing to bar “de facto noncompetes” and limit other conditions for leaving a job, such as a requirement that workers repay the cost of training.
Coercive Waivers in Context
It’s plain that noncompetes are more common than most people thought. But how much damage do they do to productivity, and how much do they redistribute income from workers to employers? Plenty, it turns out.
Workers stay in jobs with noncompetes an average of 11 percent longer, implying that they miss out on opportunities to obtain higher pay from other employers. All told, the FTC estimates that the resulting wage suppression takes more than $250 billion a year from workers’ pockets. Note, too, that the redistribution of income is not a zerosum game — a portion of the $250 billion-plus is simply lost because the lower labor mobility reduces productivity.
Then there’s the issue of the disproportionate impact of noncompetes on women and people of color. Independent research cited by the FTC concludes that the racial and gender gaps on wages would narrow by roughly 4 to 9 percent if noncompetes were barred.
On top of this, there are costs that are difficult to quantify, but nonetheless may be substantial. For example, by locking workers into jobs, noncompetes make them more vulnerable to sexual harassment and other workplace abuse that would in part be deterred by the option to work elsewhere.
Market fundamentalists argue that it’s a free country — after all, nobody makes workers sign noncompete agreements. But that position belies the realities of the U.S. labor market, especially the market for less-skilled labor in which job search is limited by time, geography and money. For many workers, there is no actual meeting of the minds or contract negotiation that underlies the imposition of these agreements. Noncompetes are usually presented at orientation as part of a package of restrictions including mandatory arbitration of disputes, a ban on solicitation of jobs from competitors and nondisclosure agreements.
Indeed, these take-it-or-leave-it conditions more closely resemble the labor contracts of the ugly past described by Hardaway because workers really don’t have much choice in most circumstances. Moreover, ugly can become even uglier: some states allow the enforcement of noncompetes even when a worker is fired or laid off.
As must be clear by now, I favor the abolition of noncompetes. But there is another side to the argument rooted in the assertion that in some cases noncompetes are the only way to protect confidential information. The argument is that nondisclosure agreements — voluntary contracts prohibiting disclosure protecting trade secrets — along with laws that prohibit the theft of proprietary information are an inadequate substitute for noncompetes. Opponents posit that former employees can still unwittingly disclose information because an employer “cannot excise” confidential information from their former employee’s brain.
But even if one accepts that, in some cases, noncompetes protect against the loss of confidential information better than NDAs and laws protecting trade secrets, the decisive issue is the imbalance of consequences between employer and employee.
There are variations on this theme. Management- side lawyers insist that, at very least, employers should be given time to convince a judge that they have a legitimate business interest in enforcing a noncompete — that the former employee should be barred from doing competitive work for a reasonable period.
Another issue is the impact of noncompetes on employers’ incentives to invest in training their employees. And here, there is some evidence that more training is common in states where noncompetes are more strictly enforced. This suggests that employers might be willing to invest more in workers who they know are less likely to leave soon.
But even if one accepts that, in some cases, noncompetes protect against the loss of confidential information better than NDAs and laws protecting trade secrets, to my mind, the decisive issue is the imbalance of consequences between employer and employee. Noncompetes typically require an employee to forego employment in their field of expertise for a year or more. Does the possibility that workers may carry away proprietary information warrant a penalty this harsh? With income inequality at levels most people see as unfair, is it just to ask workers to take a collective $250 billion hit on wages in order to prevent some proprietary information from being lost?
An obvious compromise here is to “split the baby,” allowing noncompetes only for workers above a specific pay level — say, $150,000 — or limiting noncompetes to salaried workers with high-end jobs. Barring noncompetes for low-wage workers would certainly address the most glaring issue. But it leaves another issue unaddressed: the reality that noncompetes at any wage or skill level reduce the labor mobility that is a key to social mobility and is widely seen as one big reason that productivity is so high in the U.S. economy.
Thus, in my view, the burden of proof for justifying any restriction on labor mobility ought to rest on employers. They should be asked to show that other means of protecting intellectual property — patents, trade secret laws, NDAs — are inadequate. And they need to go a step further, showing that the benefits of any general rule allowing noncompetes for whole categories of workers outweighs the social costs in terms of wage suppression and reduced labor productivity.
FTC Proposed Rule and Possibilities for the Future
Opponents of the proposed FTC rule argue about its merits as public policy. But they also argue about the legal legitimacy of the proceeding. According to Sean Heather, U.S. Chamber of Commerce senior vice president for international regulatory affairs and antitrust policy, “Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule. The Chamber is confident that this unlawful action will not stand.”
Thus, if finalized, the rule will certainly be challenged in court. Working in the challengers’ favor, the current Supreme Court is decidedly skeptical about the legitimacy of broad federal regulation. On the other hand, this court also seems inclined to defer to executive agencies as long as they honor due process.
But it will hardly be the end of the story if the Supreme Court does void the FTC rule. As noted earlier, there is some bipartisan support in Congress for a partial ban on noncompetes. More immediately promising, momentum in the states favors statutory limitations on noncompetes. California, North Dakota, Oklahoma and the District of Columbia have what amount to outright bans. Another 10 states prohibit their imposition on low-wage workers. And a few others split the aforementioned baby between exempt and nonexempt professions. Furthermore, state courts have a fair amount of discretion in deciding the enforceability of noncompetes, and in many jurisdictions the courts may be uncooperative.
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Alert readers may have already noted that the noncompete issue isn’t just about labor markets. Labor law speaks to the fundamental rights of workers. But the questions created by noncompetes also intersect issues of antitrust policy. Antitrust looks at the broader marketplace and how noncompetes affect the whole economy, zooming out from the individual who is unable to leave a particular job to how entire industries and regions are affected by employers’ power to reduce labor mobility and to keep wages below competitive levels.
Leveraging the synergy between antitrust and labor market issues, the Department of Justice antitrust division and the Department of Labor signed a memorandum of understanding last year, agreeing to work together to protect workers from employer collusion. And the nonpartisan Congressional Research Service took notice, reporting on the current state of antitrust law vis-à-vis labor markets and outlining legal changes to focus antitrust on labor issues.
The timing of this heightened interest is serendipitous. The FTC shares antitrust enforcement with the Justice Department and has already waded into labor market issues in proposing a virtual end to noncompetes. That’s a good start. Let us hope it is not the last time the agency focuses on labor markets as a central part of antitrust policy.