Members Only | January 18, 2023 | Reading Time: 4 minutes

The Biden administration moves to end noncompete agreements and the exploitation of workers

They are widespread in many industries, as is their abuse.

Federal Trade Commission Chair Lina Khan.
Federal Trade Commission Chair Lina Khan.

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In 2014, if you made sandwiches at Jimmy John’s and quit, you were barred by contract from making sandwiches anywhere else for two years. You couldn’t work within two miles of a Jimmy John’s store that made more than 10 percent of its revenue from sandwiches.

Jimmy John’s sandwich makers were forced, as a condition of employment, to sign noncompete agreements — a legal clause preventing employees from leaving to work for a competitor. 

Businesses make workers sign noncompete clauses, because they want to make it harder for workers to seek other jobs.

Most people think that only highly paid employees privy to trade secrets or other sensitive information are bound by noncompetes. 

In fact, noncompetes are widespread in many industries, and their use, and abuse, has been growing.

Even interns
Jimmy John’s was forced to settle a lawsuit over their ridiculous, noncompetes. Others may also have to abandon the practice soon.

The Federal Trade Commission (FTC) has proposed a rule to ban almost all noncompete clauses. The FTC has made preliminary findings that noncompete clauses are an “unfair method of competition” that violate Section 5 of the Federal Trade Commission Act. 

The FTC estimates that the change would increase worker wages by nearly $300 billion a year, because workers would be freed to leave their old employers to find new jobs with higher salaries.

The agency notes that noncompetes are used in a wide array of industries; hairstylists, warehouse workers, doctors and executives are all forced to sign noncompetes. 

Amazon has forced temporary warehouse workers to sign 18-month global noncompetes. Amazon has demanded that laid-off workers recommit to their noncompetes to receive severance pay. 

Even interns have been forced to sign noncompetes — though the whole point of an internship is for interns to gain experience so they can work in jobs in the industry where they are interning.

They are now ubiquitous
A 2014 survey of workers found that about 18 percent of the workforce was under noncompete agreements. A 2019 survey of businesses by EPI put the number much higher. It found that about half of all businesses use noncompetes, and that those agreements cover between 27.8 percent and 46.5 percent of all workers. 

Part of the difference is probably methodology. Many workers sign noncompetes as part of their enrollment paperwork, and may not realize it. So surveying businesses is a more accurate number.

But the increase between 2014 and 2019 is likely also an indication that noncompetes have become more ubiquitous.

EPI believes that the rise in noncompete agreements may have contributed to the longterm stagnation of US worker wages; real compensation for US workers has not increased in roughly 40 years

Noncompetes may have added to the decline in labor market fluidity. 

Commenters often claim that workers are less bound to single firms than they were in the past. But the truth is that workers have been less and less likely to seek new jobs since the early 80s

The use of noncompete agreements and other restrictions on workers’ rights, like mandatory arbitration agreements, which deny workers recourse to the courts, may be making it harder for workers to leave one employer for another, according to EPI.

Workers generally have little power to refuse to sign noncompetes. The 2014 study found that only 10 percent of workers negotiate their noncompetes. About a third of employees are told about the noncompetes after they have already received a job offer. 

Being bound to a noncompete increases the length of time an employee spends in a job by 11 percent —indicating that people stay in jobs longer because the noncompete prevents them from looking for better employment elsewhere.

One study found that in states that do not enforce noncompetes, worker wages in the same occupation were 4 percent higher than in states with noncompete enforcement. There is also evidence that noncompetes suppress wages even for workers who are not subject to them, and even in states where they are not enforced.

Noncompete clauses prevent employees from leaving jobs to create their own firms. High enforcement of noncompete clauses decreases entrepreneurship by 12 percent. 

“Locking up workers”
These negative effects are not an accident. They are the very purpose of noncompete clauses. The goal of suppressing competition is right there in the name. 

Businesses make workers sign noncompete clauses because they want to make it harder for workers to seek other jobs. The clauses leverage corporate power to force employees to sign away their future freedom and future choice. 

Under noncompete clauses, workers can work for one employer in their chosen profession, or they can work for no one.  

That’s obviously exploitative. 

“Noncompetes are basically locking up workers, which means that they’re not able to match with the best jobs for them,” FTC Chair Lina Khan told the Post. The new rules would “force employers to compete more vigorously over workers in ways that should lead to higher wages and improved working conditions, basically injecting competition into the labor market.”

The proposed new rule would make it illegal for employers to enter into noncompete agreements with workers. It would also force them to end existing noncompete agreements and to inform all workers that these agreements are no longer in effect.

More freedom, more power
There are still many other agreements businesses can leverage in abusive ways to reduce employee freedoms. Businesses can still force employees to agree to mandatory arbitration. They can still enforce non-disclosure and non-disparagement agreements. 

Elon Musk can still make a meager severance package for ex-Twitter employees contingent on them never suing the company and never speaking ill of him for life.

Ending noncompete agreements would give workers much more freedom and much more power, though. It’s a major step on behalf of labor and shows a welcome willingness by the FTC to curb corporate overreach. 

It’s also a reminder that even with the House of Representatives under the control of Republicans, the Biden White House has many tools with which to limit the power of the wealthy and thereby improve the lives of everyone else.

Noah Berlatsky writes about the political economy for the Editorial Board. He lives in Chicago. Find him @nberlat.

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