Biden Targets Non-Compete Agreements, Which Restrict the Job Opportunities of Millions of Low-Wage Workers

Yves here. While Biden noticing that non-compete agreements are an economy-constraining employer abuse is a step forward, it’s not clear that his Administration intends to do anything more than hand wave, even though the practice has become ludicrously common. Recall that the excuse for non-compete clauses is that an employee might walk off with valuable know-how that helps someone else in their industry. But now these provisions have become common even for low level workers whose jobs are so narrow that they can’t possible glean much of competitive value, and are even drafted so as to cover working in different fields. Yes, that makes the employee unemployable elsewhere, a de facto indentured servant, unless they can leave the workforce entirely for a couple of years.

California, by contrast, makes non-competes unenforceable, and it achieved that by statute. From Callahan Law:

According to the California Business and Professions Code Section 16600, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

In other words, non-compete agreements are not enforceable in California. However, that does not mean that an employee will not be wrongfully presented with one or told that they have to sign one as a condition to their employment. Employers may try to say that there are extenuating circumstances in place for them to enforce a non-compete agreement, but these arguments are usually rejected by California courts.

In other words, employees can sign employment agreements with unenforceable non-compete provisions, and just ignore any nastygrams their former employer sends when they decamp to a new job. By contrast, even if the FTC were able to take up this mandate, it would pursue actions on a company by company basis. That takes time and leaves most workers in the lurch.

By Raymond Hogler, Professor of Management, Colorado State University. Originally published at The Conversation

Most American workers are hired “at will”: Employers owe their employees nothing in the relationship except earned wages, and employees are at liberty to quit at their option. As the rule is generally stated, either party may terminate the arrangement at any time for a good or bad reason or none at all.

In keeping with that no-strings-attached spirit, employees may move on as they see fit – unless they happen to be among the tens of millions of workers bound by a contract that explicitly forbids getting hired by a competitor. These “non-compete clauses” may make sense for CEOs and other top executives who possess trade secrets but may seem nonsensical when they are applied to low-wage workers such as draftsmen in the construction industry. A 2019 business survey found that 29% of companies paying an average wage of less than $13 an hour required all their employees to sign non-compete agreements.

President Joe Biden seems to agree about the oppressive nature of non-compete contracts. On July 9, 2021, he called on the Federal Trade Commission to ban or limit them.

As a scholar of employment law and policy, I also have many concerns about non-compete clauses – such as how they tend to aggravate the power imbalances relationship between workers and bosses and suppress wages and discourage labor market mobility.

The Birth of At-Will Employment

Courts began to enshrine the at-will doctrine in the 19th century, making exceptions only for employees with fixed-term contracts. In Payne v. Western & Atlantic Railroad Co., the Tennessee Supreme Court ruled that a railway foreman in Chattanooga had the right to forbid his workers from buying whiskey from a merchant named L. Payne.

Payne had sued the railroad, claiming it couldn’t threaten to fire employees to discourage them from buying goods from a third party. The court disagreed, arguing that the railroad had a right to terminate employees for any reason – even one that involved dealing with a independent merchant.

The notion of at-will employment and its associated lack of job protections soon rose to the level of constitutional mandate. The 1894 Pullman strike, which disrupted national rail traffic, prompted Congress to pass the Erdman Act four years later. That law guaranteed the right of rail workers to join and form unions and to engage in collective bargaining.

But the Supreme Court struck down that law in 1908. Writing for the majority in Adair v. United States, Justice John Marshall Harlan explained that since employers were free to use their property as they wished, they could impose and enforce their own labor rules. Employees, in turn, were free to quit. The court summarized the law with the following statement:

“The right of a person to sell his labor upon such terms as he deems proper is, in its essence, the same as the right of the purchaser of labor to prescribe the conditions upon which he will accept such labor from the person offering to sell it,” Harlan wrote.

That might sound reasonable, but the Adair ruling led to the proliferation of “yellow dog” contracts threatening workers with firing if they joined or organized unions. The term disparaged people who were willing to accept such conditions, but the principle had widespread legal approval.

For three decades, the at-will doctrine stymied legislation that would have protected labor rights. Even when a supervisor tried to seduce a longtime employee’s wife and fired the employee in revenge, courts refused to protect the man from losing his job.

Labor Rights and the Law

With the passage of the National Labor Relations Act in 1935, all private-sector workers and unions gained the power to collectively bargain with employers. Subsequent labor agreements, such as the one negotiated by the Steel Workers Organizing Committee with Carnegie-Illinois Steel in 1937, made employers prove “just cause” before firing any person covered by the contract.

The Civil Rights Acts of 1964 and 1991 added employment protections prohibiting discrimination based on race, gender, religion and national origin. And the Americans with Disabilities Act, which Congress passed in 1990, ensured that persons with disabilities would have access to jobs with or without reasonable accommodation.

Those laws and other measures, including modern exceptions to the at-will rule, offer workers some security.

But they provide no federal protection from non-compete clauses.

Non-Competes and Low-Wage Workers

It’s unclear exactly how many U.S. workers are subject to a non-compete, but the left-leaning Economic Policy Institute estimated in a 2019 report that it’s around 28% to 47% of all private-sector workers.

The leeway for employers to impose these provisions varies widely from state to state and is in flux.

California, North Dakota and Oklahoma are the only states to ban them outright, while about a dozen forbid them with certain types of low-wage workers. Washington, D.C., also outlaws all non-compete agreements.

At the same time, some states, such as Georgia and Idaho, have made it even easier for companies to enforce them.

Critics have pointed out the disadvantages of noncompete clauses to unskilled labor.

“By locking low-wage workers into their jobs and prohibiting them from seeking better-paying jobs elsewhere, the companies have no reason to increase their wages or benefits,” Illinois Attorney General Lisa Madigan said when she sued the Jimmy John’s fast-food franchise in 2016 for making its employees sign noncompete clauses.

The chain subsequently agreed to drop its noncompetes, which had also come under fire in New York. The clauses had barred the sandwich maker’s workers from working for other companies that earn more than 10% of their revenue from “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches” for two years after leaving the Jimmy John’s payroll.

Efforts to Limit Non-Compete Clauses

Given the patchwork of state laws – and reports that companies are using non-competes even in places where they are banned – a uniform federal rule could clarify the situation and benefit both employees and employers.

The FTC has a range of options, from banning non-compete clauses entirely to limiting their use to executives and others who may possess trade secrets or other confidential information. The agency could require that the clauses come with certain due-process protections, such as a right to arbitration of contract disputes.

Executives who sign non-compete clauses already get these kinds of protections, not to mention lucrative buyout provisions.

If employees with lower pay and less prestige aren’t free to get new jobs, I believe their bosses have a corresponding duty to extend to them the rights enjoyed by people at the top of the corporate ladder, particularly independent third-party dispute resolution.

This is an updated version of an article originally published on Aug. 23, 2017.

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19 comments

  1. Michael Ismoe

    I am always amazed by how insular our friends in Washington DC are. The real non-compete clause is when you can’t get hired. I worked in an industry where there were four major controlled 98 percent of the business. There was an “informal” agreement among the four that they would not interview anyone who was currently employed by one of the other three. Legislate that – but you can’t because you can’t prove anything.

    Reply
  2. Quill

    Most executives also have no negotiating leverage and are harmed by non-competes. At a minimum, the California rule should be applied nationwide: non-competes should be unenforceable except in connection with the sale of a business.

    I would actually go farther and impose taxes on non-compete provisions (except in connection with the sale of a business) and treat it as presumptive tortious interference with business opportunities.

    Reply
  3. Arizona Slim

    This doesn’t just happen with employees. It also happens to freelancers. And, fellow freelancers, if you’re ever asked to sign a non-compete, just say no. End the business relationship right then and there.

    Speaking from personal experience on this topic.

    Reply
  4. Jeremy Grimm

    I think Biden is blowing smoke. Where is the bill to outlaw non-compete contracts? The bill should include clauses to outlaw company A from suing company B if it hires one of company A’s employees. Talk is cheap — especially Biden’s talk.

    Reply
    1. Adam1

      I agree. If we’re supposed to bow to the awesome powers of the market then highest bidder wins. If an employee is so truly valuable to the firm that loosing them would be financially devastating then compensate them for that AT THE MARKET PRICE which you now know is at least the price someone else is willing to pay.

      Oh wait, that only applies to CEO salaries. My mistake.

      Reply
    2. Mike Elwin

      I’m in California and was surprised to learn other states allow non-competes. They’re an issue now only after being singled out by the labor movement’s think tanks, EPI and NELP. The tanks should have identified unreasonable non-disclosures and warranty/indemnifications as well. Those clauses are supported even in California.
      PS
      The tanks also made misclassification an issue, mainly by misreading/misunderstanding the data.

      Reply
  5. Nikkikat

    I agree with you, Biden is just “Blowing smoke”. Not only will he NOT do most if not all of the policies he claims to support, it’s quite easy to portray these so called Bipartisan deals as much much better than they really are. Once he is out of office, we will find all sorts of things were passed in these bills, that were never covered by the press. Barack Obama being a prime example.

    Reply
    1. Aumua

      I agree with you, Biden is just “Blowing smoke”.

      Well at least it’s kind of a nice smelling smoke, like incense.

      Reply
      1. Michael Ismoe

        And the Squad poops rose petals. But they will only do what Nancy allows them to do. More Democrat Party BS. Believe what you want but i guarantee there will be non-competes in contracts long after we celebrate the naming of some Delaware high school for the “late progressive icon, Franklin Delano Biden.”

        Reply
  6. MK

    In New York, they are only enforceable if the company pays you to sign it (reasonable consideration). Otherwise, boilerplate stuff without consideration is unenforceable.

    Reply
  7. LarryB

    Maybe the company that bars someone from working a competitor should be required to the pay the employees salary, at the new rate for pay, “for the duration”. That would quickly sort out what knowledge and abilities are truly important to the original company.

    Reply
  8. Jack Parsons

    Cali’s unenforceability is (alledgedly) one of the three or four major drivers in the success of Silicon Valley.

    You get a bunch of companies in the same business down the road from each other, and non-competes make a huge difference in the movement of super- and very-competent people among the companies.

    Reply
  9. Jeff

    Headhunter here. In the 25 years I’ve been in this racket, I have never seen a company sue a prior employee over a non-compete clause. Not once.

    If a prior employee steals IP, you have damages to sue for outside of unenforceable non compete contracts. Outside of that, these contracts are worth less than the paper they’re printed on.

    Reply
    1. ObjectiveFunction

      Yes, here in Singapore and elsewhere in Asia they are allowed and fairly common, but at least in SG they are unenforceable to the extent that they can only be used against execs who walk and take clients or actual intellectual property with them. Merely exposing the company to competition without being able to show harm is a nonstarter.

      Here too though, there was a ridiculous case where a local business owner successfully sued to stop security guards from joining a competitor he personally disliked. The gentry at its most petty.

      The Saviour of Red Nation, Donald R. Trump, was notorious for tying his employees, associates up in insane contracts and filing harassing lawsuits just out of spite. Whatever incidental virtues of his willingness to say the quiet part out loud, the man is just an awful human being and has taken years off the lives of nearly everyone who has had to answer to him.

      Reply
    2. Harrold

      Often a simple phone call is enough to dissuade a company from hiring someone. The candidate may never even know why he never go that job offer.

      Reply
  10. Phil

    I wonder how this will impact, for instance, a California worker who is hired by an Arizona firm and was required to sign her non-compete in Phoenix, during her final interview and offer meetings. As the law is currently written in California (as far as I know; I’m not an attorney), the non-compete could be enforceable in CA if it was signed outside of CA.

    Non-competes are nothing more than one more attempt to “own” labor in a way that is just a few steps away from feudal work agreements.

    Reply

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