November 7, 2019
Welcome Developments on Limiting Non-Compete Agreements
Leadership in Government Fellow, Open Society Foundations and Visiting Scholar, IIT Chicago-Kent School of Law
Director of the State and Local Enforcement Project, Harvard Labor and Worklife Program. Senior Fellow, Economic Policy Institute.
A growing consensus leads to new state laws, a possible FTC rulemaking, and a strong bipartisan Senate bill.
There is a growing bipartisan consensus that non-compete agreements harm workers and the economy. This bipartisanship scarcely seemed possible back in 2015 when we were government lawyers coordinating investigations by the Offices of the Illinois and New York Attorneys General into Jimmy John’s use of non-compete agreements for sandwich makers and delivery drivers. But earlier this month, in what seems like the first bipartisan federal effort in far too long, Senators Todd Young (R-Ind.) and Chris Murphy (D-Conn.) introduced a bipartisan bill that would effectively stop the abuse of non-compete agreements. This builds on a year in which six state legislatures also passed significant non-compete reforms.
The growing use of non-compete agreements
Employer use of non-compete agreements has mushroomed in recent years. These agreements prevent people from working for their former employer’s competitors, and they were once used sparingly to prevent, for example, executives with trade secrets or confidential business information from sharing them with new employers. Now, they’re often used indiscriminately to chill job mobility for employees with no access to such information. A 2015 study found that 40% of Americans have had a non-compete agreement at some point in their career. As lawyers, we’ve worked on cases involving non-compete agreements used for janitors, receptionists, customer service workers, fledgling journalists, even employees of a day care center.
Why are non-compete agreements so bad? They fly in the face of our fundamental American belief that anyone can work hard, gain skills, and move on to a better opportunity to build a better life. Non-compete agreements can trap workers in jobs they want to leave—whether because of sexual harassment or other poor working conditions, or even just a bad boss. They limit the talent pool, preventing employers from hiring the best worker for the job. Non-compete agreements can also stifle economic dynamism, blocking people from starting their own businesses.
Workers’ inability to leave their jobs because of non-compete agreements and similar limitations has also contributed to the wage stagnation of recent decades. Two studies released just last month found that non-compete agreements adversely affected wages and job mobility. This makes sense, given that the agreements erode the leverage that workers typically get from the threat of leaving their jobs to work elsewhere. That threat is now empty for millions of Americans subject to these provisions, showing that non-compete agreements aren’t really about trade secrets anymore. They’re about limiting workers’ bargaining power.
A new Senate bill could restore bargaining power
The new Senate bill, the Workforce Mobility Act of 2019, is notably robust, and should attract bipartisan support, from legislators motivated by concerns about economic liberty and entrepreneurialism as well as those focused on job quality and workers’ rights. The bill contains the following key provisions:
- Prohibition of non-compete agreements: The bill would prohibit use of non-compete agreements in almost all situations. The bill also declares that non-compete agreements are unenforceable. (While the bill does not explicitly address whether non-compete agreements already entered into would be automatically rendered unenforceable on the effective date, the plain language suggests that they would not be grandparented in.)
- Limited exceptions: The bill contains limited exceptions that in our view are minimal and sensible, allowing for use of non-compete agreements with regard to owners and senior executives in the sale of a business.
- Trade secrets: The bill explicitly permits employers to protect trade secrets by requiring workers to sign more limited agreements not to disclose such secrets.
- Enforcement: If enacted, the law against non-compete agreements would be enforced collaboratively by both the Federal Trade Commission (FTC) and the United States Department of Labor (DOL). The bill also provides for civil fines of $5,000 per week of violation, and creates a private right of action, with damages and attorneys’ fees available for successful lawsuits.
- Public education and outreach: Given the lack of knowledge of many workers about workplace rights, the bill sensibly contains outreach and public education provisions, requiring employers to post a notice and also requiring the Labor Secretary to conduct outreach specifically on this issue.
- Regulations: The bill would allow the Labor Secretary to promulgate regulations.
- Reporting: The bill requires a report from the two enforcement agencies one year after the Labor Secretary issues regulations.
Other efforts to curb non-compete agreements
This strong bill comes in the context of many other efforts to curb non-compete agreements. At the federal level, the FTC is reviewing a petition submitted by the Open Markets Institute along with numerous labor groups and law professors, seeking a rule prohibiting non-compete agreements; a group of senators also urged the FTC to take this action. The FTC appears to be seriously considering the petition. Although last month in congressional testimony, FTC Chairman Joseph Simons said his team “couldn’t find enough existing economic literature to justify a rulemaking,” he also noted that the Commission would continue to examine the issue.
Meanwhile, in the past several years, over 10 states have passed laws limiting employers’ ability to impose non-compete agreements on their employees. Many of these laws, including those reforms passed in Illinois, Maine, Maryland, Massachusetts, New Hampshire, Oregon, Rhode Island, and Washington, ban non-compete agreements or make them unenforceable for some or most workers in the state based on their income. States like Illinois exclude only low-wage workers while others, like Washington, bar non-compete agreements for any worker earning up to $100,000 annually. Other states have recently limited use of non-compete agreements for certain professions such as physicians (like in Florida), broadcasters (like in Utah), and home health care aides (like in Connecticut). State reforms also vary in terms of whether they specify a time limit for the duration of non-compete agreements and whether an employer has to pay money to workers while a non-compete agreement is in effect.
In addition, some states have other types of limitations for non-compete agreements. They’ve long been unenforceable in California; also, in most states, even without a statute on point, courts will generally only uphold a non-compete agreement if it protects an employer’s legitimate business interest and is reasonably limited in duration and geographic scope. The issue, of course, is that non-compete agreements are rarely reviewed by courts so this case-by-case approach is insufficient.
State and federal policy recommendations
At the federal level, the Senate bill and FTC petition are both positive developments that have the potential to address the abuse of non-compete agreements in a nationwide and holistic way that addresses both their individual and market harms.
Meanwhile, more states can and should continue to act on this issue. Indeed, a bill was just introduced in the District of Columbia to ban non-compete agreements for individuals paid below $87,654 (3 times D.C.’s minimum wage). Here are some important considerations as policymakers consider their options:
- Non-compete agreements should be prohibited, not just unenforceable. This distinction is important, because if they are unenforceable, this just means that they won’t be upheld if they are challenged in court. But most non-compete agreements never make it to court: workers assume they are valid or, even if they suspect the non-compete is too broad, most workers can’t afford to take on the risk and expense of possible litigation. This results in a chilling effect, as workers stay in their jobs regardless of the actual legality of their non-compete agreement. It also fails to disincentivize employers from using overly broad non-compete agreements; the worst that can happen is that the provision would be found invalid.
- For this same reason, there should be penalties available for employers that include illegal or unenforceable non-compete agreements in their employment contracts.
- Non-compete agreements should be prohibited ideally for all workers, or for the vast majority of workers. Some states have limited the prohibition only for very low-wage workers. This approach does not address the larger impact on job mobility and competition, as well as basic fairness, as we have previously written. Non-compete agreements should also be prohibited for independent contractors and interns, as states like Washington have done.
- Given limited public enforcement resources, laws should include a private right of action with attorneys’ fees. Legislators concerned about excessive litigation should note that this is not a complex topic and should be easy for employers to comply with: all they have to do is not include a non-compete agreement in their employment contracts.
- States that do decide to permit non-compete agreements for certain categories of workers or in certain circumstances, should consider:
- Adopting a relatively high, and also very clear, income cutoff below which employees cannot be subject to a non-compete agreement. This kind of bright-line rule is much more administrable for employers, workers, and enforcers, and leads to less litigation.
- Specifying that non-compete agreements must be clearly and fully disclosed to workers at the time a job offer is made, not after a job is accepted or after work has begun.
- Requiring, as Washington does, that employers pay workers a mandatory set amount (a reasonable percentage of their salary) during the time any non-compete agreement is in effect. This type of payment, known as “garden leave,” serves two important purposes: it provides income to a worker whose earnings are limited or nonexistent because of a non-compete agreement, and it creates a disincentive for employers to include such terms in their contracts, causing them to actually consider whether a non-compete agreement is truly needed to protect business interests.
- Clarifying that all non-compete agreements must still conform to that state’s case law, used only to protect a legitimate business interest, and reasonable in terms of duration and geographic scope.
Whether the new federal proposals gain traction or the states continue to lead on non-compete agreements, it’s good to see that there are still some issues so fundamental to our economic well-being that policymakers can find allies across the aisle.
RELATED: Read Jane Flanagan's issue brief about how the federal government and states have been combating the overuse of non-competes.