Most of us take it for granted that we have a right to quit our current job and find a new one. But a growing number of workers are seeing this freedom curtailed by noncompete contracts that bar employees from taking jobs with a competitor of their previous employer.
A new report from the White House portrays this trend as a threat to both worker rights and economic growth. Limits on worker mobility can slow the spread of knowledge and, therefore, the rate of technological progress. These agreements also reduce worker bargaining power, which can lead to lower wages and make it harder for workers to find jobs they enjoy.
The report is the latest sign of growing interest in this issue from policymakers. Last year Hawaii banned noncompete agreements for workers in the technology sector, while Oregon banned them for doctors and Oregon and Utah placed new time limits on the deals.
But in recent years, no state has gone as far as outlawing these agreements outright. And that's true even though one of the few states where noncompete agreements are totally unenforceable, California, is also one of the nation's most innovative.
Noncompete agreements may be a barrier to high-tech innovation
Noncompete agreements have traditionally been used against highly skilled workers to prevent them from taking company secrets to competitors. In theory, the enforcement of these deals gives workers a greater incentive to provide worker training and invest in research and development programs.
However, it's not obvious that stopping the spread of knowledge in this way is actually good for the economy as a whole. Critics point to a famous 1999 paper that attributes Silicon Valley's success to the state's refusal to enforce noncompete agreements. With California courts refusing to enforce these contracts, Silicon Valley developed a job-hopping culture that promoted the rapid spread of new ideas.
It's impossible to know for sure, but critics of noncompetes argue that this freewheeling culture was a key factor that allowed the San Francisco area to outpace other regions — like Boston's Route 128 corridor — as the nation's premier technology center.
There's widespread concern about noncompetes among low-skilled workers
There's a lively debate about whether it's a good idea to enforce noncompete agreements against highly skilled employees. But it's harder to defend the use of noncompete agreement against lower-skilled workers. The White House cites one study finding that 14 percent of workers making less than $40,000 per year and 15 percent of workers without college degrees are subject to noncompete agreements.
These workers are unlikely to receive much training, and they rarely possess valuable trade secrets. In one infamous case, for example, the Jimmy John's sandwich chain has been asking its employees to sign agreements promising not to take their sandwich-making skills to competing sandwich shops. It's hard to imagine that this restriction increases the incentive Jimmy John's has to invest in better sandwich-making techniques.
What it can do, however, is limit workers' bargaining power and thereby push down wages. The White House points to empirical research finding a connection between stronger enforcement of noncompete agreements and lower wages.
One way to address this problem would be to ban noncompete agreement for low-wage workers. A proposal from Sen. Al Franken (D-MN) and Sen. Chris Murphy (D-CT) would do just that, prohibiting the contracts among workers making less than $15 per hour.
But there are also other, less dramatic actions policymakers could take. For example, employers often ask employees to sign noncompete agreements after they've already accepted the job, limiting their bargaining power. The White House argues that employers could be required to notify employees of the noncompete agreement at the time they make a job offer, giving employees an opportunity to look for a different job if they want to.
The White House also suggests that noncompetes should be unenforceable in cases where a company lays off workers. The White House also points to states where the courts automatically strike down overly broad noncompete language, giving employers a stronger incentive to write narrower, less onerous noncompete rules.
States should think bigger
The White House is a naturally conservative institution, so it's not surprising that it's sticking to these relatively modest reform ideas. But it's worth asking whether states shouldn't go even further.
Noncompetes have been unenforceable in California for more than a century. Not only does this not seem to have hurt the state's economy, it may have helped the state attract the talent that made Silicon Valley what it is today.
More fundamentally, noncompete agreements impose a major restriction on the freedom of employees to decide where they want to work. We're a nation that values freedom, and where you work is one of the most important decisions any working adult makes.
In recent years, no state has gone the full California route and banned the enforcement of noncompete agreement outright. But some of them should try it. Absent compelling evidence that noncompetes are economically beneficial — and if anything, the evidence suggests the opposite — states might want to err on the side of protecting worker autonomy.