The Federal Trade Commission has proposed an imminent ban on noncompete contracts. Prohibiting these contracts is an important step toward assuring we still have access to the American Dream. It will help businesses innovate in our tight labor market, ensure workers are not stuck in dead-end jobs and make the United States more competitive with regards to our foreign counterparts.
If you’ve been employed, odds are that at some point you have heard of noncompete contracts, and there is a good chance you may have signed one. Historically, businesses used them with high-level executives to prevent them from taking trade secrets to competitors. However, in the last half a century, many businesses have abused noncompete contracts by using them to avoid competition or prevent workers from leaving.
For example, I have defended in court non-English-speaking cleaning people who were sued for having the audacity to switch jobs in violation of their noncompete contracts. The Illinois attorney general once sued Jimmy John’s over its use of noncompete contracts for sandwich-makers. The list of noncompete abuses is long and gut-wrenching and there is no right to a free lawyer when a worker is sued for violating a noncompete contract.
Building upon and invoking existing antitrust law, the FTC proposes that noncompete clauses be barred as an unfair method of competition. The rule also would require employers to rescind any existing noncompete clauses. The evidence examined by the FTC demonstrates that noncompete clauses suppress wages, reduce competition and stifle innovation.
Workers bound by noncompete clauses regularly ask employment lawyers: “I signed a stack of onboarding paperwork on my first day on the job that had a noncompete. It isn’t enforceable, is it?” They are shocked to learn how much it will cost to “get out” of their noncompete contract when they are sued. As a result, few employees ever challenge noncompete contracts and instead reluctantly comply with them while giving up better job opportunities, resulting in less money for them and their families.
FTC economists estimated that noncompete contracts suppress American workers’ income by $250 billion to $296 billion per year. This is not surprising. Why would an employer pay competitively if an employee is contractually prohibited from leaving?
Equally troubling, even if an employee is willing to take the risk of getting sued, many prospective employers simply will not hire a candidate subject to a noncompete contract. Whether or not the fear is realistic, prospective employers today rarely perceive hiring a worker as being worth the risk of getting dragged into a lawsuit.
Noncompete contracts also hurt innovation by preventing competitors, particularly startups, from hiring talented workers. Entrepreneurship and startups are historically a driver of job creation and technological advancement. However, noncompete clauses prevent people with good ideas from being able to interact with others, killing innovation at the start. On top of that, new companies and startups have a harder time finding qualified talent because prospective employees are tied up with noncompete contracts. Likewise, many entrepreneurs cannot start a new business, which results in fewer marketplace options for consumers.
The proof is in the Golden State: In California — which has long banned noncompete agreements — worker mobility helped launch that state’s roster of high-tech companies, which includes Apple, Google, Facebook and Uber. Innovation and hard work — in other words, our human resources — are always what have made America competitive against our foreign competitors.
Some companies, particularly those businesses that have their employees locked up with noncompete contracts, are wary of doing away with noncompete clauses. It is important to recognize that the FTC is not proposing to ban nondisclosure agreements, confidentiality or trade secret laws. Therefore, businesses will continue to have ample protection for their business interests.
These companies, however, will need to rely on courting their talent, instead of threatening to take their talent to court.
