It’s time to reform workplace noncompete clauses
Noncompete clauses are conditions in an employee’s work contract that limit him or her from going to work for a firm’s competitors. Such clauses are now so common that they threaten to hamper the labor market’s mobility and dynamism. Thankfully, there are potential reforms that could neutralize that threat, while still preserving the use of noncompete clauses to protect legitimate business interests.
Noncompete agreements can be beneficial when they encourage businesses to make investments in human capital and other intangible property. Such agreements allow employers to operate free from the worry that a competitor will swoop in and poach employees, along with the trade secrets now held in their heads. When a white-collar worker in a management position moves to a competitor, it can be highly damaging to their former employer, given the worker’s knowledge of the company’s strategy and proprietary information.
But worryingly, blue-collar and service workers also may be pressured to sign noncompete clauses, despite not possessing any proprietary knowledge. Almost 30 million Americans — about 18 percent of the workforce — are subject to noncompete agreements. That includes 14 percent of workers who earn less than $40,000 a year. Anecdotes abound of lower-income Americans who are contractually trapped in their current jobs, including the infamous case of the Jimmy John’s sandwich chain, which chose to require noncompete clauses for its service workers.
The empirical literature suggests that noncompete agreements reduce employee motivation and contribute to lowered labor-market dynamism, mostly by reducing the mobility of affected workers. Broadly enforced noncompete agreements tend to lower wages. There also is evidence that states where noncompete agreements are broadly enforced tend to suffer from brain drain, as workers leave for localities where such agreements are enforced more narrowly.
Many conservatives and libertarians, pointing to the importance of freedom of contract, rightfully would be hesitant to seek a government remedy to this problem. To be sure, voluntary agreements between workers and firms are a hallmark of market economies, and there should be a high standard for state intervention. Fortunately, there are reforms available that could temper the harm of noncompete clauses without employing the kind of government overreach that led California to ban most noncompete clauses outright.
There are currently 22 states without any statute governing the use and enforceability of noncompete clauses, which leaves employees and firms to navigate a complex web of state case law. Setting up transparent guidelines would reduce the uncertainty for workers and allow them to better decide whether to agree to a clause’s terms. For example, requiring employers to disclose a noncompete agreement during employment negotiations would further empower workers to better exercise their bargaining power on the market. Right now, only two states legally require this of employers, but others should think about following suit.
Statutes that clarify the enforceability of noncompete clauses would also help workers negotiate more effectively before accepting an employment offer. Firms using these clauses often threaten competitors with cease-and-desist notices if they poach an employee, even when the contractual language in question is unenforceable. This tactic could be more effectively combated if both parties were perfectly clear on the terms of enforcement before they entered into the contract.
At the federal level, two bills have been proposed to ban noncompete clauses for workers below a certain wage threshold. While this could help workers of lower socioeconomic status move between jobs, it may also discourage employers from providing training that improves those workers’ economic prospects in the long run. This is especially so for many blue-collar occupations that require specialized training, such as welding or electrical work. As a better alternative, federal policymakers could provide model legislation for states without statutes governing noncompete clauses, helping those states to provide much-needed clarity for workers.
While it wouldn’t be wise to ban noncompetes outright, there is considerable room for conservatives and libertarians to work with the center-left on reforming them. Greater certainty about enforceability and expanded prior notice during employment negotiations would help level the playing field for workers and firms, rectifying the problem and spurring greater labor-market competition in the bargain.
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