Limiting Non-Compete Agreements is Key to a Just Recovery?

Najah Farley

As tens of millions of workers—more than one-fifth of the U.S. workforce—were losing their jobs at the start of the pandemic, worker advocates sounded another important alarm: In many states, being laid off would not release workers from “non-compete” agreements they had signed with their employers, which would restrict what future job offers they could accept.

The prospect that employers could hamper workers in their return to work by using non-competes seemed like a far-off possibility in March 2020. But now, with many seeking to return to work, the possibility of workers being bound by past non-compete agreements or agreeing to new ones is deeply concerning. Non-competes limit workers’ power and autonomy and exacerbate existing inequities that disproportionately harm workers of color.

What Are Non-Competes?
Non-competes are contracts, signed by employees when they accept a job, that restrict them from taking a job in the same industry for a set period of time after they leave their position. Restrictions may be defined by industry or geography, and some may list specific rival competitor companies that employees are prohibited from joining. Research suggests that nearly one in five U.S. workers is currently bound by a non-compete. The types of workers bound range from chief executive officers to security guards to sandwich makers, as in the infamous Jimmy John’s case that first brought this issue to the fore.

Nearly one in five U.S. workers—from CEOs to security guards to sandwich makers—is currently bound by a non-compete.

Employers usually present non-compete provisions in a “take it or leave it” fashion. They may require workers to sit out of the labor market for a year or even longer. Not surprisingly, non-competes have been shown to depress wages by reducing competition. This is what economists refer to as the problem of monopsony, where employers have greater market power and are able to continue to offer lower wages due to lack of competition.

Non-competes may exacerbate the wage gap that workers of color face.

Push for State Reforms
Many legislatures are successfully taking on the challenge of non-compete reform. New laws have been passed or are advancing in several states. Bills were introduced in West Virginia, Minnesota, Connecticut, Colorado, New York, and Iowa. In New York, Governor Kathy Hochul included a non-compete provision in her budget proposal, and the State Senate also introduced a bill. Both the West Virginia and Iowa bills proposed banning non-competes for workers in low-wage industries.

Many legislatures are successfully taking on the challenge of non-compete reform.

The Minnesota non-compete proposal would limit agreements to an annual salary equal to the median family income and also provide for “garden leave”, i.e., an employer would have to pay 50 percent of the employee’s highest annual base salary during the restricted period. Connecticut’s bill, had it passed, would have set the non-compete threshold close to $100k. Colorado’s bill would be an important improvement of the state’s previous non-compete law. Although many legislative sessions ended without passing the non-compete laws under consideration, the bills in New Jersey, New York, and Colorado are still being considered.

Movement Nationally
President Biden’s initiative to improve competition through his Executive Order on Competition, released on July 9, 2021, has also helped fuel the push for these bills. As a result of this directive, federal agency work in the area has increased.

On March 7th, the Treasury Department, in partnership with the Labor Department, the Justice Department, and the Federal Trade Commission (FTC), released a report on “The State of Labor Market Competition.” The report found that the lack of competition results in wage declines of between 15 and 25 percent. It also highlighted the power differential that exists between companies and workers, based on information asymmetry as well as labor market forces, that leads to employers exerting market power and offering lower wages and worse working conditions. Now that the FTC has a full complement of commissioners, advocates are pushing for the agency to pursue rulemaking in this area. The Open Markets Institute initially submitted a petition to the FTC in 2019, joined by 60 signatory organizations, including NELP.

Coercive waivers, such as non-disclosures, arbitration agreements, and non-competes, work together to reduce worker power.

Where We Go From Here
In the wake of the “Great Resignation,” management-side lawyers have become even more aggressive in their tactics to keep employees bound by these coercive agreements. In a recent blog post on a human resources site, management-side lawyers stated that they have seen an uptick in employers wanting to sue employees because of the talent shortage; they not only want to retain the employees but also prevent them from going elsewhere. Such articles highlight the abusive way in which non-compete agreements are used to block workers from going elsewhere to use their talents and skills.

In the wake of the “Great Resignation,” management-side lawyers have become more aggressive in their tactics to keep employees bound by coercive agreements.

State law advocacy will hopefully help level the playing field for workers seeking to be free from onerous non-compete agreements imposed by their employers, but advocates still have more to do.

While many states are moving in the right direction, federal legislative reform and rulemaking remain crucial.

The Workforce Mobility Act, sponsored by Senators Chris Murphy (D-CT) and Todd Young (R-IN), would eliminate non-competes for the majority of workers, keeping them only for workers involved in the sale of a business. This bipartisan bill would go a long way toward ensuring that workers can chart their own careers; it would take power away from employers that abuse the use of non-competes. A federal bill that bans non-competes for workers could, like Oregon’s non-compete law, have a positive impact on the wages of hourly workers. Now is the time to continue to push for broad non-compete reform, creating the just recovery that workers need.

This blog is a shortened version of one that originally appeared in full at NELP on May 19, 2022. Reprinted with permission.

About the author: Najah Farley is a senior staff attorney at NELP, who focuses on workplace standards and wages.

The post Limiting Non-Compete Agreements is Key to a Just Recovery? first appeared on Today’s Workplace.

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