White House issues call to action on non-compete clauses
Labor mobility is fundamental to the ability to earn good wages. The improvement in incomes and living standards over the centuries is tied tightly to the growing ability of workers to quit the job they have and take another. And it is a timeless truth that employers will try to find new ways to hamper their employees’ legal right to leave. Increasingly, they are turning to non-compete clauses that they slip into the fine print of employment contracts. Thirty million U.S. employees, many of them relatively low wage workers, are bound by non-competes.
Peasants in medieval times were generally not permitted to leave the land on which they were born, and throughout Europe and Russia they were essentially owned by the owner of the land, their lord and master. The use of indentured servitude in the cities was a less onerous but still heavy burden on young workers, who were forced to work for years with little or no compensation for a single master, whose abuse or mistreatment usually had no remedy.
Slavery is the most extreme example of a legal limitation on labor mobility and the most destructive. Slavery in the United States not only brutalized and impoverished the enslaved, it dragged down the wages of anyone forced into competition with them. Slavery’s effects on free labor were an additional reason beyond simple morality for Abraham Lincoln and the free soil movement to oppose slavery. How could free construction workers, for example, demand higher wages if their employer’s competitor was using unpaid, enslaved labor?
Prison labor is little better than slave labor and should be kept out of competition with private industry and free labor. Prisoners in the United States today are paid as little as 27 cents an hour for their work, and their products should never be sold on the open market—but they are.
The greatest gains in wages and incomes in U.S. history came with the rise of the union movement in the 19th century and its success in the 20th. Unions fought to outlaw contracts that bound employees to their employer like servants to their masters, fought laws that made it a crime to quit before the end of a contract of employment, and fought laws that made striking and picketing a criminal conspiracy.
Once Congress endorsed collective bargaining and made the right to strike a key part of the National Labor Relations Act, the labor movement took off and wages rose with it. Having the right to quit work en masse—the right to tell the boss to take his job and shove it—was the ultimate example of labor mobility. Blacklisting of union members and activists, which would decrease their ability to quit and take other jobs, was also outlawed by the National Labor Relations Act.
As unions have been weakened over the past several decades, new restraints on labor mobility have begun to crop up. The temporary, non-immigrant (“guestworker”) workforce that employers bring in from other countries is now well over a million, each tied to a single employer that can make them deportable by firing them. For the most part, they can’t leave that employer no matter how bad the working conditions are, how low the pay is, or how badly the employer breaches its contract. That’s a recipe for wage suppression and exploitation.
The undocumented workforce is in a similar situation, as Hillary Clinton pointed out in the third presidential debate. Undocumented workers are afraid that if they stand up to their employer and protest mistreatment—or try to leave and go to another employer—they will be reported to immigration authorities and deported. So they tolerate abuse and low wages, which drags down wages and labor standards for other workers in their area and industry.
Every limit on labor mobility, such as tying guestworkers to a single employer, should be examined to determine whether it can be justified, whether it is doing more harm than good.
The non-compete agreement is one such limit that has a superficial appeal. Non-competes are clauses in an employment contract that forbid an employee who leaves from working in the same industry in the same area for a certain period of time. Workers who sign a non-compete agreement—often unwittingly or without any real understanding of its impact—can find themselves locked into employment with one employer, unable to seek or accept better paying jobs because all new employers in the area are competitors.
Survey evidence shows that many non-competes are not really the result of an agreement: many employees have no idea that they are bound by such a clause. Fewer than one employee in five consults an attorney before signing, and only about one in ten attempts to negotiate the terms of the non-compete. And even when they do know what they’re agreeing to, the choice is between taking a job and not taking it in a tough labor market that favors employers.
The White House, looking to remove restraints on competition that might suppress wages or hurt the economy in other ways, has identified non-competes as a real problem. Non-competes impact approximately 30 million—nearly one in five—U.S. workers, including roughly one in six workers without a college degree. Workers have been forced to sign non-competes in order to work at sandwich shops, doggy dare care and grooming services, summer camps, and warehouses. None of these jobs involves trade secrets or any proprietary information that can justify restraining the ability of employees to seek better pay and working conditions somewhere else.
Research comparing states that have and have not banned non-compete agreements or strictly limited their use indicates that non-compete agreements measurably depress wages. By discouraging startups by former employees, they also limit entrepreneurship and restrain productivity increases.
In response, the White House has issued a three-part call to action for state legislatures and policymakers, encouraging them to:
- Ban non-compete clauses for categories of workers, such as workers under a certain wage threshold, workers in certain occupations that promote public health and safety, workers who are unlikely to possess trade secrets, or those who may suffer adverse impacts from non-competes, such as workers who have been laid off or terminated without cause.
- Improve transparency and fairness of non-compete agreements by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power), providing consideration over and above continued employment for workers who sign non-compete agreements, or encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.
- Incentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promoting the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.
Of the three options, the first would deal most effectively with the problem, by banning the least defensible non-compete agreements—those applying to ordinary workers and limiting their mobility for the sole purpose of controlling them and their wage demands. It is outrageous that anyone paid less than the national average wage should be bound by a non-compete agreement. The right salary threshold below which no non-compete agreement should be permitted is probably upwards of $70,000 a year. And workers laid off through no fault of their own, no matter what their industry or salary level, should never be bound by a non-compete.
The White House’s attention to this issue, as well as issues like forced arbitration and employer collusion to hold down wages, is heartening. I hope this interest in freeing working people from unreasonable constraints on their mobility and freedom to seek better jobs continues into the next administration.