Lawmakers are trying to curb contracts that make it harder to change jobs

May 17, 2018 | By | Reply More

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IN 2011 Kathleen started work at an insurance-and-benefits consultancy in Boston. A couple of years later the firm gave her an ultimatum: sign a “non-compete” agreement within 30 days or wave goodbye. She signed, which meant that, if she left, she would be barred for three years from working for a rival or any firm that had been contacted as a potential client, and from starting a competing business. In 2015, when she accepted a new job in a different industry at an unrelated company, her former bosses threatened to sue. The job offer was withdrawn, and reinstated only when she offered to pay any legal costs that resulted. The matter never came to court, but the fear of legal action has kept her out of her old industry ever since.

Non-compete agreements are widely used to stop ex-employees walking out of the door with valuable know-how, or poaching suppliers and customers when they move jobs. Sometimes a great deal of money and intellectual property is at stake. When Paul English, an entrepreneur, sold his travel-search website, kayak.com, to Priceline for $1.8bn in 2012, he signed a contract that barred him from working in the travel industry for 18 months. The restriction was fair, he says. “If a company pays nearly $2bn, they have the right to tell you that you can’t create a competitor.”

But non-competes are common for ordinary American employees, too. Nearly one in five are subject to them and nearly two-fifths have had to sign one at some point, as have about 15% of low-wage workers and a similar share of employees without university degrees. A report in 2016 by the Treasury noted that less than half the workers covered by non-competes reported having access to trade secrets. They are sometimes used indiscriminately. Jimmy John’s, a chain of sandwich shops, used to make its restaurant workers and delivery drivers sign them. The clause barred them, for two years after leaving, from working for any other sandwich shop within two miles of any of its 2,700 outlets. It stopped using them in 2016 at the behest of the New York attorney-general’s office, which said that non-compete agreements “limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued”. 

Such arguments are gaining force across America. Several state legislatures are considering restricting their use, at least for workers on modest wages. A few are thinking of copying California, where non-compete agreements count as illegitimate “restraints of trade” unless they protect trade secrets or are part of the deal when a business is sold. The legislatures in Pennsylvania and Vermont are both considering laws similar to California’s. Bills in Massachusetts and New Jersey would bar non-competes for workers earning less than a certain amount, as well as limiting their duration and entitling ex-employees to compensation during the non-compete period. Although the law governing employment contracts has long been regarded as a matter for states, a group of Democrats in Congress, led by Elizabeth Warren, has proposed a federal ban. (A similar effort in 2015, just for workers earning less than $15 an hour, failed.)

Non-competes might not be harmful for workers, on balance, if employers had to pay extra to compensate employees for signing away some of their rights. But an analysis by Evan Starr of the University of Maryland suggests this is not what happens. Hourly wages are 4% lower in states that enforce non-competes than those that do not. This may be because the agreements make it harder to switch jobs—one of the main occasions when a worker’s pay rises. Mr Starr finds that applicants presented with non-competes after they have accepted a new job earn on average 10% less than those who know it will be part of the deal in advance, when they are still in a position to negotiate.

Other researchers have considered the spillover effects of non-compete agreements for the wider economy. Jessica Jeffers of Chicago’s Booth School of Business finds that companies invest in equipment more in states where non-competes are legally enforceable. Mr Starr has found that they do more training, too, perhaps because they have more certainty that their employees will stay and they will get the benefit. All that should be good for productivity. On the other hand, Ms Jeffers has also found that fewer companies are formed in these states in high-skilled sectors such as technology, professional services and education. That is likely to be bad for innovation. Silicon Valley became a technology hub, says AnnaLee Saxenian of the University of California, Berkeley, partly because of California’s long-standing hostility to non-competes, which has facilitated the flow of ideas and made it easier to start new firms.

Hands off

Even some employers are joining the fight against non-competes. Last July Veeva Systems, a cloud-computing company in California, filed a lawsuit against Medidata, QuintilesIMS (now IQVIA) and Sparta, competitors based elsewhere that had invoked agreements signed by ex-employees to stop them moving to Veeva. Out-of-state non-competes, the company argues, should not be enforceable in California. Peter Gassner, the firm’s boss, complains of a “double standard”, whereby employers based elsewhere can poach Californian workers while making it hard for Californian companies to hire out-of-state. Non-competes may benefit some employers by making it cheaper and easier to keep workers—but at the cost of leaving others to fish in a shallower talent pool.

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