(Bloomberg) -- 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.
What is a noncompete agreement and what is it used for?
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.
They can protect companies with intellectual property or time-sensitive innovation assets, said Emily M. Dickens, the chief of staff and head of public affairs at Society for Human Resource Management. But a crackdown by the FTC could isolate those cases while still allowing greater mobility for other workers.
“There are jobs we know right now that are requiring them where it’s not necessary, and in that case, this could help stop that issue,” she said.
Why is the FTC trying to ban most noncompete agreements?
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.
What if you live in a state that already makes noncompete agreements unenforceable?
Some states, including California, North Dakota and Oklahoma have legislation that makes noncompete agreements unenforceable. Oregon, Illinois, Washington and others limit their use among low-wage workers.
Even so, workers may have signed contracts in those states anyway. “People are given a big packet on their first day of work — in many cases, when they have already accepted a job and turned down other job offers — and it says, you can’t keep this job unless you sign these things,” said Heidi Shierholz, the president of the Economic Policy Institute.
Signed or not, these contracts can deter employees from switching jobs even where they’re not enforceable. The proposed FTC rule would also require employers with existing agreements to inform employees that the contracts are being dissolved.
Would a noncompete agreement ban really help you make more money?
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.
Shierholz with the EPI cited existing evidence that some high-paid workers like doctors and lawyers may be able to negotiate higher wages as a result of signing a noncompete agreement ahead of accepting a job — but they’re the exception, not the rule.
“That is not the typical person who signs a noncompete agreement,” she said. Overall, signing a noncompete is “a sign of having very little power and having what little power you have taken away,” she said.
Who stands to benefit the most from a noncompete agreement ban?
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.
Could employers make you sign something else?
Depending on the state, employers might ask for a nondisclosure agreement or some other contract that limits how much information workers can share with future jobs. Several states have banned nondisclosures related to workplace discrimination. Other employers might retain ownership rights to intellectual property.
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.
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