The White House has begun raising the alarm about a growing employer abuse: “non-compete agreements” which workers are pressured to sign, promising not to do the same kind of work in the same area for another company within a certain period of time after leaving a job. Research suggests that 30 million U.S. workers are currently covered by non-compete agreements, even though many of those agreements are unenforceable in court.
And according to a White House analysis released May 5, noncompete agreements have the potential to hold back wages: When workers are prevented from accepting competitors’ offers, they have less leverage in wage negotiations and fewer opportunities to develop their careers. One researcher found that workers who switch jobs — if they’re covered by a non-compete — are more likely to leave their industry, resulting in “reduced compensation, atrophy of their skills, and estrangement from their professional networks.”
Historically, non-competes were only used with key employees like top managers. They were used to prevent workers with ‘trade secrets’ from transferring technical knowledge and intellectual property to rival firms. But it’s moved beyond that. Increasingly, low-wage workers are being told to sign non-competes, often after they’ve already agreed to accept the job and made plans according. Non-competes cover an estimated 18 percent of the workforce overall, 15 percent of workers without a college degree, and 14 percent of workers earning less than $40,000.
The most notorious case so far is probably the national sandwich chain Jimmy John’s, which requires its employees to sign an expansive non-compete agreement that would ban them for two years from working at any other store that makes at least 10 percent of its sales from sandwiches.
Not just workers, but also consumers and the economy more generally are harmed by non-competes, says the White House document, which draws on a March 2016 report from the U.S. Treasury Department. Non-competes negatively impact other companies by constricting the labor pool from which to hire, and they prevent workers from launching new companies.
Several bills in Congress would bar non-competes for workers earning less than $15 an hour or $31,200 a year, but the bills don’t appear to be headed for passage currently.
So in the meantime, the White House document points to several state laws as examples other states should follow.
- In California, Oklahoma, and North Dakota, non-competes are flat-out illegal and unenforceable in court.
- In Oregon, they’re heavily restricted. Under a law passed in 2007, they’re legally unenforceable for workers earning less than the median family income for a family of four (currently $73,300 a year), and for workers who are terminated for any reason other than just cause. And the non-competes are only enforceable if the employer pays the worker for the period of time they’re restricted from working — $36,650 a year, or half what they were earning while they were working, whichever is greater. Employers also have to inform workers in writing at least two weeks before the start of employment if a non-competition agreement is required as a condition for employment.
- In Idaho, a 2008 law restricts non-competes to “key employees” — those who “by reason of the employer’s investment of time, money, trust, exposure to the public, or exposure to technologies, intellectual property, business plans, business processes and methods of operation, customers, vendors or other business relationships during the course of employment, have gained a high level of inside knowledge, influence, credibility, notoriety, fame, reputation or public persona as a representative or spokesperson of the employer, and as a result, have the ability to harm or threaten an employer’s legitimate business interests.”
But even where non-competes are legally unenforceable, some employers are requiring workers to sign them, capitalizing on workers’ ignorance of the law. In California, where they’re flat-out unenforceable, 22 percent of workers surveyed reported that they have signed a non-compete.
In the coming months, the White House, the Treasury Department and the Labor Department are planning to convene a group of experts in labor law, economics, and business to discuss non-competes and their consequences. They’ll look at state best practices, and issue a call for state-level reforms.
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