This week the White House proposed a new plan to increase labor market competition and wage growth in the United States — one that prominently featured a call to state governments to rein in "noncompete agreements." These arrangements — far more widespread than most people think — prohibit employees from leaving to join or start firms within the same industry as their existing employer.
By reducing barriers to employee mobility and entrepreneurship, the White House seeks to both help firms hire the best workers they can and give individuals the ability to move to the job that is best for them.
Noncompetes are really nothing new — historians date the first case to 1414. They were initially used by master craftsmen who sought to prevent freshly graduated apprentices from setting up shop in the same town where they’d trained.
So why are they suddenly becoming the focus of significant public scrutiny? The pros and cons of noncompetes have been hotly debated for the last two decades in tech circles — with the arguments centering on whether noncompete enforceability reduces inventor mobility (it does: see here and here), and whether it is good or bad for innovation in general (the evidence points toward bad, but the jury is still out). But the lack of broader public interest is better explained by a simple fact: Noncompetes are private, known only the parties who agree to them. There is no public repository of noncompetes and no regular surveys that ask about them. In short, their lack of observability makes them inherently challenging to study.
In the last year, however, a number of investigative efforts have revealed noncompetes in a variety of surprising places: Firms have imposed them on minimum-wage sandwich makers, for example, and on teenage camp counselors. In one particularly shocking example, Spencer Woodman, at the Verge, revealed that temporarily employed Amazon packers promised that for 18 months after they left their jobs at Amazon they would not:
engage in or support the development, manufacture, marketing, or sale of any product or service that competes or is intended to compete with any product or service sold, offered, or otherwise provided by Amazon…
Is there any job that that language would not apply to?
At the same time, Norman Bishara of the University of Michigan, J.J. Prescott, also of the University of Michigan, and I produced the first large-scale, national survey of the use of noncompetes, enabling us to quantify how pervasive these contracts are. The data shows that roughly 30 million labor force participants are currently bound by a noncompete — nearly one in five American workers — and that many of them are not the high-skill tech workers that might naturally come to mind. For example, we estimate that while those earning more than $150,000 have essentially a 50 percent chance of working under a noncompete, those earning between $20,000 and $40,000 still have a 15 percent chance of doing so.
The combination of these troubling anecdotes and data showing that noncompetes are systematically used even in low-skill, low-paying jobs jolted policymakers into action. They realized that low-skill workers are 1) unlikely to possess legitimate business interests (trade secrets or client lists) that would damage a firm; 2) in no position to properly consider or negotiate the terms of the noncompete; and 3) especially susceptible to threats over violating a contract that bears their signature. Indeed, we find that only 6 percent of low skilled workers negotiate over their noncompetes, and that noncompetes are powerful deterrents to the mobility and entrepreneurship of that sub-population. These findings form the basis of the White House’s first proposal:
Ban non-compete clauses for categories of workers, such as workers under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from non-competes, such as workers laid-off or terminated without cause.
Some of these recommendations can already be seen in recent bills or proposals, such as the ban for low-wage workers that passed over the summer in Illinois, and the recent proposal to ban them for low-wage workers in New York.
The second of the White House proposals has to do with the transparency and fairness of noncompete agreements. Two recent academic articles find that firms often delay the offering of a noncompete until after the employee has accepted a job, and that this delay helps to explain the lack of negotiation we see over such agreements. (Economic theory suggests that employees ought to negotiate noncompetes precisely as they negotiate salary, but we don’t see that happening in many contexts.)
As the White House detailed in a state-by-state guide to current noncompete rules, in 35 states firms can delay the onset of a noncompete and it will be fully enforced in court. The result is that in these states firms have an incentive to hide the noncompete in a pile of papers to be signed on a worker’s first day or even delay the onset of the noncompete further, until the worker has essentially no bargaining power.
Perhaps unsurprisingly, recent research has shown that wages are relatively higher for workers in states that require employers to either provide employees time to consider the noncompete or explicitly provide employees with some sort of compensation, such as a bonus, in exchange for signing.
The White House therefore also recommended this week that states require that noncompetes be presented before a job or promotion has been accepted — and also that companies ought to be required to give workers something, in exchange for signing a noncompete agreement, beyond a promise that they get to keep their job.
These recommendations have already been enacted in Oregon and New Hampshire, which require that a noncompete agreement be introduced before someone accepts a job. Currently, there is a bill in the Senate, the Mobility and Opportunity for Vulnerable Employees Act, or MOVE Act, that — in addition to banning noncompete agreements in contracts for low-income workers — would require employers to notify workers at the time of the job offer if they were going to use a noncompete.
The third of the White House proposals underscores how states handle noncompetes that are deemed unenforceable. There are two primary concerns: First, in more than half of the states in the US, courts that deem a contract to be overly broad will rewrite it to be less broad before enforcing it. This "reformation" approach creates obvious incentives for firms to write broad contracts (such as Amazon’s) because in the worst case scenario the contract will be somewhat reduced in scope but still enforced. Nevertheless, overly broad contracts may still have strong deterrent effects on worker mobility and entrepreneurship if individuals do not know that the terms are unenforceable as written.
Second, noncompetes can have effects even in states where they are not enforced. Noncompetes in California and North Dakota are largely unenforceable in court, for example, but recent research suggests that they are used just as frequently in those states as they are in states where they are enforceable. Why such unenforceable noncompetes are used so frequently is an open question, though a recent paper points to an information gap between what employees believe about the enforceability of noncompetes and their actual enforceability. That’s why the White House suggests states
[i]ncentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promoting the use of the "red pencil doctrine," which renders contracts with unenforceable provisions void in their entirety.
Currently, the MOVE Act and the New York proposal include damage provisions, which allow employees to sue firms for writing noncompetes expressly forbidden by law. The "red pencil" doctrine is used in Nebraska, Virginia, and Wisconsin.
Not all will agree with the policies outlined by the White House proposal — which is not surprising, given how controversial noncompetes are. For example, some may suggest that firms need enforceable noncompetes to invest in the training of their low-skill workers. This claim has not been examined specifically in the context of low-wage workers, but the evidence suggests that technical workers are the ones who experience the most training benefits as a result of enforceable noncompetes.
Nevertheless, the set of proposals set forth by the White House are based in empirical evidence and reflect a deep knowledge of state law. They provide a blueprint for sensible reform which, if adopted, ought to increase fairness in the labor market and increase wages and entrepreneurship in the US.
Regardless of how you feel about the policies, however, the White House should be applauded for their commitment to bring significantly more data to bear on an important issue that has flown under the radar for too long.
Evan Starr is an assistant professor of management and organization at the Robert H. Smith School of Business, University of Maryland. He holds a PhD in economics from the University of Michigan.
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