As noted in our recent blog post, Non-Competes - What To Know Before You Sign, the use of non-compete agreements which used to be reserved for highly paid executives or sales employees with access to confidential, sensitive company information has risen dramatically to include many lower wage workers in industries from fast food restaurants to retail to hair salons. Today, workforce studies estimate that over 30 million American workers are asked to sign non-competes as a condition to accepting a job offer.
The dramatic rise in the use of non-competes and other contracts restricting workers who need or want to take a new job has led to a host of problems, not just for the workers but for employers as well. Consequently, there is a rising tide of calls for reform at both the state and federal levels that would limit the use of these agreements from being applied to lower wage workers, or in some cases ban them outright.
So, What’s the Problem with Non-competes and Why are Leaders Calling for Change?
While the stated intent of non-competes and similar restrictive agreements may be to protect a company’s trade secrets or investments in specialized training for its employees, the practical effect of the rising use of non-competes is to unfairly block workers from changing jobs. Without the ability to change jobs, may workers, especially those in lower wage positions, lose the ability to improve or advance by moving to another job with higher wages or better working conditions. This limits their economic opportunities and suppresses their income.
But the problems with non-competes are not limited to lower wage earners. Studies have also shown that by limiting worker mobility, non-competes and similar restrictive agreements stifle innovation and economic growth in a state or region where they are enforced. For example, one study found that in states where non-competes are vigorously enforced, wages fall not only within that state but in neighboring states as well.
The limits a non-compete places on a worker’s ability to change jobs not only stifles innovation by preventing an employee with a good idea from starting out on his or her own, but it can also harm businesses looking for new talent. Companies looking to expand or hire experienced workers may be prevented from bringing on someone who has a non-compete in effect. Non-competes and similar restrictive employment agreements reduce innovation and economic development by obstructing the flow of knowledge and innovation in a local economy. Non-compete agreements have real economic costs that go beyond those that affect the employer and the worker who signed it.
Calls for Change from the Whitehouse to the Statehouse
In July 2021, President Biden signed an Executive Order on Promoting Competition in the American Economy. One of the key provisions of the Executive Order intended to increase competition in the American economy, increase wages for workers, and promote faster economic growth and innovation is a directive encouraging the Federal Trade Commission (”FTC”) to consider exercising its statutory rulemaking authority to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Since that time, the FTC has signaled that it may use its rulemaking authority to limit the use of non-competes. And in Congress a bipartisan bill known as the Workforce Mobility Act has been introduced in both the House and the Senate, which would restrict the use of non-competes.
At the state level, Iowa is poised ban non-competes for lower wage workers. Proposed laws in Oklahoma, Vermont, and West Virginia would also limit the use of non-competes for lower wage earners and require employers to give notice to employees and job seekers that they will be asked to sign a non-compete.
Many of the states looking to limit the use of non-competes are patterning their proposed laws after a model bill called the Uniform Restrictive Employment Agreement Act, drafted by the National Conference of Commissioners of Uniform State Laws. States are not required to enact the uniform law recommended by the Commission, but it gives many states a model to follow that could help make sure state laws are more consistent in the limits they place on the use of non-competes and the protections such restrictions would give to workers.
Employees should have an attorney review a non-compete agreement before signing. It is often easier to negotiate changes to the restrictions at the beginning of employment than at the end.
For more information on non-competes and proposed changes to the law see:
THE WHITE HOUSE FACT SHEET: Executive Order on Promoting Competition in the American Economy
Uniform Restrictive Employment Agreement Act
Restrictive Employment Agreement Act
Red State Lawmakers Look at Noncompete Bans for Low-Wage Workers