Noncompete agreements bar about 30 million American workers from quitting their jobs to work for rival companies or start their own businesses, a practice that the Federal Trade Commission calls exploitative and wants to ban.
The arrangements, which critics say can hold down wages and hinder innovation, are especially common in industries like manufacturing, technology and health care, where as many as 45% of primary care physicians are bound by the agreements. While the rationale for these clauses is often to protect intellectual property, they can restrict low-wage workers like food service employees and security guards from seeking a similar job in the same field.
The contracts vary in scope and duration, but typically bar employees from working at a competitor or starting a company in the same field as their current employer based on time, industry or geographic constraints, the National Employment Law Project notes.
Two reasons companies commonly give for noncompete agreements are to protect trade secrets or client relationships and to incentivize employers to train workers by assuring they won’t take that knowledge to a rival.
The FTC says noncompete agreements block people from higher pay and better conditions, given that workers typically land higher wages when they switch jobs. According to a report by the agency, these contracts and other anti-competitive practices, like pay secrecy, suppress wages by about 20%.
Banning noncompete agreements means that employers would be forced to find positive ways to retain workers rather than punitive ones, said Denise Rousseau, a professor of organizational behavior and public policy at Carnegie Mellon University. These can include boosting pay and investing in workers’ skill development.
An analysis by the Federal Reserve Bank of Atlanta found that people who switched jobs from July 2021 through July 2022 saw their wage increase by 6.7%, two percentage points higher than those who stayed in their jobs.
Banning non-competes also incentivizes companies to boost pay to attract and retain workers. When Hawaii banned the contracts for tech workers in 2015, new hires saw a salary boost of about 4%. That would translate to a raise of about $4,400 for a software engineer earning the state’s average salary of $110,775 for that industry.
Low-wage workers, who often don’t have much bargaining power to begin with, would likely benefit the most in the form of higher pay, more employment options and mobility.
Proponents of the new rule argue it can be good for businesses, too: It could free some entrepreneurs to start new companies and make it easier for employers to hire.
Rousseau at Carnegie Mellon said that if employers can find alternative methods to protect trade knowledge and affirm workers, they may be more likely to retain employees. “Can you do in a way that is respectful and appreciative to employees, and not viewing them like the enemy?” she said.
Tribune News Service