Why Non-Compete Agreements Are Ridiculous

Traditionally, non-compete agreements were required of only senior executives or professionals with certain kinds of specific knowledge. But increasingly, companies are using them to hobble hourly workers in fast food, warehouse work and even doggy daycare facilities.

Were enterprises actually investing in training employees there might be some justification, but as the following article explains, in an era of 'activist' investors and nano-second securities trading, every penny of profit counts. The reality is that employers might do better to provide more competitive compensation and benefits to staff if they want to optimize productivity, efficiency - and retention. JL

Jordan Weissman reports in Slate:

Jimmy John's—yes, as in the sandwich chain—was requiring its low-wage hires to sign an expansive noncompete clause that would ban them from working at any other fast-food restaurant that served meat between two pieces of bread.

There was a time when noncompete agreements, which ban employees from leaving their company for one of its rivals, were mostly reserved for powerful executives and other highly paid professionals. But lately, they've been popping up in an increasingly comical assortment of industries, as businesses have sought out ever-more elaborate ways to assert control over their workers. Last year, the Huffington Post discovered that Jimmy John's—yes, as in the sandwich chain—was requiring its low-wage hires to sign an expansive noncompete clause that would ban them from working at just about any other fast-food restaurant that served meat between two pieces of bread. The Verge found that Amazon was also making its warehouse staff sign noncompetes, though the company responded to the report by dropping them from its contracts. The New York Times turned up the restrictions at a summer camp and a salon. Even a doggy daycare facility has gotten in on the act. 

This is all both vicious and absurd. Theoretically, noncompetes exist in order to prevent workers from walking off to a competitor with sensitive business secrets. But sandwich makers, dog sitters, and hair stylists are not typically in possession of lucrative intellectual property. Employers are simply using these agreements to limit the ability of their workers to bargain for higher pay by making it harder for them to find another job. They're a cudgel against people who already don't have the power to stand up for themselves.

Democratic sens. Chris Murphy of Connecticut and Al Franken of Minnesota introduced legislation meant to put this farce to an end. The bill would ban noncompete agreements altogether for workers who make less than $15, and require companies to let potential hires know ahead of time that they will be required to sign one. It's a good bill that could help arrest noncompete creep.

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But why not go further—and ban noncompetes altogether? There's nothing magical about workers who earn more than $15 per hour. People who pull down a $20 or $25 wage don't exactly have a ton of bargaining power with their employers. And while everybody is right to be aghast at the way Jimmy John's has decided to shackle its employees, the biggest problems with noncompetes have nothing to do with poorly paid service workers. Instead, we should worry most about the way they discourage entrepreneurship.  

While many states place limits on noncompetes, only a handful more or less refuse to enforce them at all. One of them is California (although judges there have been willing to honor clauses that were signed out of state). And many attribute the Golden State's success as a startup haven to the fact that workers have traditionally been free to move from one job to another and found companies using the skills they learned at their old employers.

Indeed, researchers have shown that inventors

are less likely to leave their employers—and research and development spending tends to be lower—in places where noncompetes can be enforced. They have also concluded that fewer new businesses spin off from large companies in those states, and venture capital investment leads to fewer startups or patents, as well as less job growth. Finally, there is some evidence that noncompetes lead to brain drain, as talented workers leave for greener pastures where the clauses don't hold sway. Rutgers University law professor Alan Hyde summed it all up succinctly last year for the Wall Street Journal. “You have slower growth, fewer startups, fewer patents and the loss of brains to jurisdictions that don't enforce the agreements,” he told the paper.

Another way to put it: With noncompetes, you get Boston. In Massachusetts, there are few limits on the agreements. And not coincidentally, the Route 128 tech corridor is dominated by large companies that are far stodgier than the startups in Silicon Valley. The problem is widely acknowledged enough that former Governor Deval Patrick pushed for a noncompete ban along the lines of California's. But the effort faltered after meeting resistance from the sorts of incumbant companies that use the clauses to stifle potential competition.

There are some arguments in favor of noncompetes. Although there are laws against workers stealing their old employer's trade secrets, they can be hard to enforce, since it's very difficult to know what your old coder or biotech researcher is up to at his new job. Preventing employees from running over to another company in the first place is much simpler. There's also evidence that companies are more likely to spend time and resources training their workers when they are covered by a noncompete, since management have some assurance that their investment won't just up and walk out the door.

But it seems unlikely that those benefits come even close to outweighing the costs that noncompete impose on the broader economy. Meanwhile, employers have become more aggressive in recent years about suing old workers to enforce their noncompete clauses, which has almost certainly intimidated many others into sticking around rather than starting their own venture or leaving for better-paying work at another company. That speaks to the fundamental power imbalance that makes these laws so pernicious. While many states will only enforce "reasonable" noncompete clauses, it's a lot easier and more affordable for a company to bring a lawsuit than it is for a lone scientists or engineer to defend against one. So even in cases where workers are protected by law, they may not want to risk the litigation required to prove it.

It might be enough to simply scale back noncompetes so that they'd still be applicable to top executives—who, if anything, may have too much negotiating power against their boards. But if we're talking about doing away with them for sandwich artists, maybe we do away with them for everybody.