The chances are high that you have signed one, but you might not remember: About 30 million Americans, or more than 20 percent of the country’s full-time workforce, have signed a non-compete clause as a condition of working for their employers. The logic behind agreeing to a non-compete clause is simple: It prevents a worker from quitting to work for a competitor, or starting his or her own business using knowledge gained from their previous employers. For a C-level executive, or someone working within a specialized field like law or engineering, entering such an agreement appears to be fair enough, as most of these clauses are only enforceable for periods ranging from six months to two years.
One problem, however, is that about 15 percent of U.S. workers who make less than $40,000 a year, including security guards and fast-food workers, have also signed these agreements. Among the macroeconomic results is the suppression of wages. Further, these agreements are more than unfair; fundamentally, it’s morally wrong to tell someone that they don’t have the right to do better for themselves by finding another job at which they could both be paid and treated better.
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Nevertheless, the vast majority of these non-compete agreements could be null and void soon if the U.S. Federal Trade Commission (FTC) has its way. Following a July 2021 executive order that urged U.S. federal agencies to find ways to make the economy more “competitive,” the FTC announced last week that it wants to ban the practice.
To be clear, only rank-and-file workers would benefit from such a change.
At first glance, the FTC’s move is a big a win for employees, as the agency claims it would increase wages in total by almost $300 billion a year. In theory, as many as 30 million Americans could see their job prospects improve — and it would certainly prove to be a boost for employee engagement efforts.
Non-complete agreements are among the many reasons that, despite everything we hear about the “free market,” the U.S. economy is anything but. Many U.S. workers feel tied to their jobs, links that are invisible but strong. To start, many Americans are locked into massive mortgages, which discourages them from moving, thereby limiting economic opportunities, risk taking and innovation. Overall, U.S. industries have been subjected to a lot of consolidation in recent decades, resulting in less competition, a trend noted by pro-free market publications like the Financial Times. Related to all this is the fact that U.S. wages, long stagnant, took a further hit due to the recent spike in inflation. Supporters of the FTC’s proposed rule say that ending the enforcement of most non-compete clauses would be the first step in freeing up the labor market.
Business groups, including the U.S. Chamber of Commerce, are fighting the rule, citing the need to protect consumer data and intellectual property — curiously enough, there’s no mention about the need to ensure free markets. In any event, red and blue states alike such as California and Oklahoma have banned the practice, and several other states already prohibit the non-compete clause for lower-paid jobs.
The FTC is allowing for a public comment period before making a final decision. There’s a good chance that certain highly paid employees at larger companies in some sectors like tech (understandably) or who may have access to highly confidential information could be exempt.
But the same cannot be said for most smaller companies — and in any event, a non-compete clause can get in the way of their efforts in seeking to attract new talent.
Writing for the Guardian last month, Gene Marks noted that making employees sign a non-compete clause could generate more trouble than it’s worth. In reality, the reason why most of these agreements work in the first place is that many employees feel intimidated by the mere reminder that they signed a piece of paper sitting in their HR file. Going after that employee who signed on with someone in the same city or town is a fool’s errand, Marks argued. “Plus, it’s bad PR and doesn’t reflect well on a company and its owners both with their outside community and current employees,” he added. “Why is that big, bad company going after that poor little worker anyway?”
The lesson, said Marks, is that onus should be on the company to ensure that their employees feel valued: “Regardless of how ‘important” or “critical’ an employee is, just how damaging will it be if that person works for your competitor? Are you that afraid? Have you not protected your intellectual property? Do you not have other employees that will fill the gap? If that employee is so important to your small business, have you not done what you could to make them happy working for your company?”
Image credit: Gabrielle Henderson via Unsplash
Leon Kaye has written for 3p since 2010 and become executive editor in 2018. His previous work includes writing for the Guardian as well as other online and print publications. In addition, he's worked in sales executive roles within technology and financial research companies, as well as for a public relations firm, for which he consulted with one of the globe’s leading sustainability initiatives. Currently living in Central California, he’s traveled to 70-plus countries and has lived and worked in South Korea, the United Arab Emirates and Uruguay.
Leon’s an alum of Fresno State, the University of Maryland, Baltimore County and the University of Southern California's Marshall Business School. He enjoys traveling abroad as well as exploring California’s Central Coast and the Sierra Nevadas.