Changing jobs can often be the best way to get a raise. But employers frequently force workers to sign “noncompete clauses,” contract stipulations that make it harder for workers to move to better jobs and artificially depress wages.
That will change later this year.
The Federal Trade Commission recently issued a new rule declaring that most noncompete clauses in employment contracts are unfair. The new rule bans employers from requiring workers to sign these agreements and prohibits the enforcement of existing “noncompetes” for workers other than senior executives.
The only leverage non-union workers have with their employers is their ability to quit and take a job somewhere else. But employers have been using noncompete agreements to cut that source of worker power off at the knees.
This is an important step toward fostering fair competition and empowering workers.
Noncompete agreements are employment provisions that ban workers at one company from working for, or starting, a competing business within a certain period of time after leaving a job. They’re ubiquitous. The Economic Policy Institute finds that more than one out of every four private-sector workers are required to sign one as a condition of employment.
These agreements aren’t limited to high-wage workers in knowledge-sensitive occupations and industries. More than a quarter (29%) of private workplaces with an average wage of less than $13.00 per hour used noncompete agreements for all their workers, according to one survey.
The only leverage non-union workers have with their employers is their ability to quit and take a job somewhere else. But employers have been using noncompete agreements to cut that source of worker power off at the knees.
The research on the economic impact of noncompetes is clear: By keeping workers from finding better opportunities, they reduce wages and reduce the formation of new firms. In other words, by restricting employees from joining competitors or starting their own ventures, noncompetes impede not only individual career and wage growth but also the dynamism of the broader economy.
Employers don’t need noncompetes to protect their trade secrets, as they sometimes claim. Intellectual property law already provides significant legal protections for trade secrets. Noncompetes have been unenforceable in California for decades without keeping that state from becoming a leader in tech innovation.
Further, noncompetes are often bundled with other anti-competitive employer practices that harm workers.
For instance, over half of firms surveyed that required noncompetes for at least some of their employees also required workers to agree to mandatory arbitration, rather than the court system, to resolve disputes with their employers. This underscores that the purpose of noncompete agreements is to restrict employees’ options, not protect trade secrets.
Noncompetes are about reducing competition, full stop. It’s in their name.
Noncompetes are bad for workers, bad for consumers, and bad for the broader economy. By banning them, the FTC’s rule will help raise wages for workers and take an important step toward creating an economy that is not only strong but also works for working people.
