ARE NONCOMPETE AGREEMENTS ENFORCEABLE?

JULY-AUGUST 2017        NO. 132

COMPANIES COMPETE BUT WON’T LET THEIR WORKERS DO THE SAME

Americans, we are told, believe in competition.

But a shockingly large number of workers — 30 million, according to a report from the Treasury Department — are shackled by what are called “noncompetes,” which are agreements forbidding employees to leave their job to work for a competitor or to start their own competing business.

And the number is growing fast.

So if you’re the hiring company, it’s critical to ask the people that you are thinking of hiring if they are subject to any kind of noncompete restrictions. (It’s something we always ask candidates on behalf of our client companies.) You need to know if hiring an individual will subject you to a potential lawsuit.

Once reserved for a corporation’s most treasured rainmakers, noncompetes are now routinely applied to low-wage workers like warehouse employees, fast-food workers and even dog sitters. One out of every six workers without a college degree has signed one. By including them in employee contracts, employers can use the threat of litigation to constrict wages and employee mobility.

Noncompete agreements, like other anti-competitive practices, poison our economy in larger, less tangible ways. There is strong data showing that they reduce employee motivation, entrepreneurship and sharing of knowledge, the fundamental building blocks of innovation and economic growth.

At a minimum every state should ban noncompetes for all low-wage workers, for all workers in occupations that promote public safety and health, such as physicians and nurses, and for all workers who are laid off or terminated without cause. Looking forward, the research suggests that noncompetes should be banned for all employees, regardless of skill, industry or wage; they simply do more harm than good.

In 2016, the Obama White House issued a Call for Action urging states, and Congress, to push back against the overwhelming expansion of noncompetes (full disclosure: I was part of the White House’s working group on noncompetes). Vice President Joe Biden collected testimonies of workers bound by noncompetes: a Nebraska teacher who couldn’t take a summer job selling pet food because of her job the previous summer; a 56-year-old Connecticut salesman who was forced to retire because of a noncompete clause; a woman in Ohio who left an abusive marriage and was then threatened with lawsuits for taking an entry-level sales job with a new employer.

Because laws governing noncompetes vary from state to state, we can analyze the effects of these kinds of contracts on wages, competition and labor mobility. The evidence shows wages in states that enforce noncompetes are 10 percent lower than in states that restrict their use. The Treasury Department concluded in its recent report that “by reducing workers’ job options, noncompete agreements force workers to accept lower wages in their current jobs, and may sometimes induce workers to leave their occupations entirely, forgoing accumulated human capital.”

Workers bound by noncompetes cannot rely on outside offers and free-market competition to fairly value their talents. Without incentives to increase wages in-house, companies can allow salaries to plateau. And while noncompete restrictions impose hardships on every worker, for women these restrictions tend to be compounded with other mobility constraints, including the need to coordinate dual careers, family geographical ties and job market re-entry after family leave.

California and Massachusetts offer a case study within the high-tech industry. California strictly voids all noncompete agreements. In Massachusetts where I live, and like most other states— noncompetes are enforced. Both California and Massachusetts enjoyed an early boom of economic growth within the high-tech market, but California’s Silicon Valley has continued growing, while Massachusetts has sputtered.

Unlike in Silicon Valley, the employees of the Massachusetts tech companies were bound by noncompete agreements, and the enforcement of those agreements kept out new businesses by preventing people most likely to start new businesses — experienced former employees — from staying in the region. Meanwhile, in Silicon Valley, entrepreneurial activity flourished; thanks to California’s refusal to enforce all noncompetes (including those from other jurisdictions), it remains the tech center of the world.

Some states, including Colorado, Oregon, Illinois and New York, have recently introduced reforms. Hawaii passed a law in 2015 prohibiting noncompetes in the tech industry.

Federally, Congress introduced two bills last year — the Limiting the Ability to Demand Detrimental Employment Restrictions Act (Ladder Act) and the Mobility and Opportunity for Vulnerable Employees Act (MOVE Act).

The best companies already realize the damaging effect of post-employment restrictions. Companies with little turnover risk becoming stagnant and myopic. In fact, relying on noncompetes rather than active recruitment and retention creates a market for lemons — a business will end up with employees who stay despite their unhappiness.

Smart leaders treat departing employees as alums, rather than sour exes in a divorce. But too many other employers have become increasingly litigious against their former employees, relying on noncompetes rather than positive incentives to retain the best talent and curtail the competition.

The liberty to move in the job market not only supports workers’ choice, equality and wage growth but also creates the competition that catalyzes entrepreneurship, innovation and overall economic growth. If we want a healthy and free market, we should not shackle workers to the first business that offers them a job. Let them compete.

Source: New York Times

To read more about noncompetes, nonsolicitation, and nondisclosure agreements, click here (pdf).

This material is provided as general information only and does not constitute and is not a substitute for legal or other professional advice.

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