Noncompete Agreements Target Vice Presidents And Janitors Alike, But Why?
Will the first firm pursue you for leaving your position if you decide to work for one of its rivals while employed there? Whether or not you consented to a noncompete clause may determine that. A noncompete clause in a contract forbids a former employee from working for a rival firm for several months or even several years after leaving the company. In other words, noncompete agreements are made to prevent employees from using their skills and confidential information for the benefit of the competitors. For highly compensated corporate executives, TV hosts, or tech professionals, whose unexpected departure to the competition would pose a significant threat, that might make sense.
But the absurd thing about noncompete clauses is that American businesses have required all different kinds of workers—home health care providers, sandwich shop staff, even dog walkers—to sign them. A noncompete agreement restricts the ability of about one in five American workers, according to data from 2020 that was published in the Journal of Law and Economics. President Joe Biden issued an executive order in early July 2021 requesting the Federal Trade Commission (FTC) to prohibit or restrict the use of noncompete clauses in employment contracts.
According to research co-author Evan Starr, an assistant professor of management and organization at the Robert H. Smith School of Business at the University of Maryland, "you'll find noncompete agreements in every part of the U.S. labor market." Interns, people making minimum salary, and even volunteers for charitable organizations are signing them in areas like California where noncompete agreements aren't even enforced. Nearly 40% of the 11,505 American workers questioned by Starr in his research have signed noncompete agreements at some point in their employment, and 18% are now subject to one.
That comprises a third of employees making $40,000 or less. 29 percent of firms earning less than $13 an hour compelled their employees to sign noncompete agreements, according to another report by the Economic Policy Institute. 36.5 percent of the participants in their survey who made $22.50 or more per week had signed noncompete agreements.
Does the purpose of noncompete clauses make sense?
The traditional defense of noncompete clauses is that they reduce some of the risk involved in recruiting and onboarding new personnel. Companies devote time and money to educating new employees, and a part of that training entails disclosing insider knowledge, possibly even trade secrets, about how the organizations operate. "The firm is at a competitive disadvantage if the worker is able to go across the street and join a competitor," claims Starr. The business had to spend a lot of money developing such knowledge.
Another argument in support of noncompete clauses is that employees are not required to sign them, as stated by the pro-business Maryland Chamber of Commerce: "Noncompete agreements are crucial to the growth and profitability of organizations by preserving trade secrets and promoting corporate development." As an integral part of the broader employment contract, they are negotiable. A worker has the option of asking for a raise in pay or quitting if they feel that agreeing to a noncompete provision is excessively restrictive. In actuality, though, less and fewer people are in a position to negotiate and even fewer stop to think about the implications of signing a noncompete agreement. Less than 10% of employees bargain over their noncompete clause, according to Starr. "When a worker is given a noncompete agreement, they often just sign it more than 85% of the time."
Are Non-Compete Agreements Really Enforced by Businesses?
If you're one of the millions of Americans who has signed a noncompete agreement, you may believe that not many of these agreements are ever put into action. Only the biggest fish would be pursued by businesses, right? Nope. According to Starr, "there are roughly 1,000 noncompete lawsuits filed annually, and you'll find all kinds of employees that you'd never expect to be in the judicial record." According to a Wall Street Journal analysis, the number of noncompete lawsuits rose by 60% between 2002 and 2013. Consider the home health attendant who attempted to resign and work for a competing company but was subsequently sued by his Pittsburgh-based agency.
Or the well-known instance of the janitor who attempted to work for a competing cleaning company and was subsequently sued by her $1 billion employer, Cushman & Wakefield. After a public uproar, the corporation decided to dismiss the case. Different kinds of noncompete agreements are currently enforceable in 47 states. Noncompete clauses are now forbidden for all employees in all but California, North Dakota, and Oklahoma. Several additional states, including Maryland, have outlawed noncompete clauses for low-wage workers. The noncompete agreement, however, may still be enforced in Florida even if you were fired from your position, according to Starr.
The truth is that not many noncompete disputes end up in court. Whether you're a manager or a janitor, the very existence of these noncompete agreements and the vague language they include is typically enough to discourage employees from leaving for a better-paying position with the competition. A clerk with a Philadelphia home health business signed one such contract. Within five years of leaving the employment, the employee was not allowed to work for any of the company's clients within a 35-mile radius, and the five-page contract required them to pay the business' legal costs should a lawsuit arise.
Starr questions, "How many of these employees have the resources to wage a court battle?" He claims that employees who dare to quit for more favorable conditions will receive threatening letters from the business's attorneys. Noncompete agreements are bad for not only the employees who sign them, but also for the entire U.S. labor market, including employers, claims Starr. "Ninety percent of the time, these threatening letters tend to resolve the issue. What you see in the courts is a small, small sliver of what's actually going on," she says.
"Let's imagine that fifty percent of the employees in a particular market sector are subject to a noncompete agreement," explains Starr. The negative effects of noncompete agreements are even felt by employees who are not bound by them, as stated by one employer who was trying to fill a position: "If you're a firm trying to fill a position, it's going to be really hard to hire an experienced worker, because everyone's bound by noncompete agreements." According to Starr's research, the sheer existence of noncompete agreements "gums up" the labor market, lowering wages, slowing the hiring process, and decreasing the likelihood of receiving a job offer.
What will change as a result of Biden's executive order?
Now, the FTC must decide how aggressively to pursue noncompete agreements. It might enforce standards to make the process more transparent, or it could outlaw their use in low-wage positions, as other states have done. For instance, despite having already discussed compensation and benefits, many employees are requested to sign noncompete agreements on their very first day of work. The FTC might demand advance notification for these arrangements. Noncompete clauses, in the opinion of Starr, are rarely necessary.
Make employees sign nondisclosure agreements if a business is serious about safeguarding its trade secrets (NDAs). If a company wishes to safeguard its client investment, it should require employees to sign nonsolicitation agreements, which restrict an employee from approaching clients of the company they recently left for a certain amount of time. There are even contracts that demand a worker to pay back a portion of their training fees if they quit within two years for jobs that require months or years of training. However, unlike noncompete agreements, they do not limit where employees can work, according to Starr. "The essential difference is that all of those other agreements are directly related to the interest that the firm is attempting to protect."