Pete Ryan
In July 2016, Margaret Beebe of Syracuse, New York, suffered a career setback when a local laboratory rescinded a job offer, which included higher wages, regular hours, and no travel. The laboratory discovered that Beebe had signed a non-compete agreement with her former employer, a Texas-based nationwide provider of clinical services.
The agreement prohibited her from working for competitors within a fifty-mile radius for nine months. Beebe was devastated because she felt trapped in her job, which required long hours driving to homes and offices in upstate New York, where she conducted basic physical exams, drew blood, and collected other bodily samples for laboratory analysis.
Beebe was released from her non-compete agreement after she reached out to New York State Attorney General Eric Schneiderman, who contacted the Texas-based firm, which agreed to no longer require New York-based employees to sign agreements. Most of them were low-level employees like Beebe who did not have unique skills or access to trade secrets.
“Many workers, especially women and people of color who have suffered sexual harassment and other forms of workplace abuse, stay in dead-end jobs because they lack savings to support themselves during the period of no wages.”
Once limited to senior executives, engineers, and scientists, non-compete agreements prohibiting a departing employee from taking a job with a competitor—even if he or she is fired—are spreading to blue-collar jobs like warehouse employees, home health care workers, fast-food workers, janitors, and hair stylists who are bearing the economic brunt of the new coronavirus because they lack paid sick leave.
A 2016 Treasury Department report found that 18 percent of American workers, including 15 percent of those without a four-year college degree and 14 percent of those earning less than $40,000 a year, have had to sign non-compete agreements.
“Non-compete agreements have been used for many years by employers who claimed that agreements were necessary to prevent departing employees from sharing their trade secrets,” says Ryan Nunn, the report’s principal author, in a recent phone interview.
But today, non-compete agreements are common among workers who “possess trade secrets at less than half the rate of their better educated, higher earning colleagues,” says Nunn, now policy director of the Hamilton Project at the Brookings Institution, a nonprofit public policy organization in Washington, D.C. “This suggests that employers are using non-compete agreements for other reasons, which has serious implications for individual workers as well as the overall labor market.”
Evan Starr, an assistant professor of management and organization at the University of Maryland, agrees: “Non-compete agreements deprive employees of their most important asset: their ability to apply their skills in new positions that will advance their career and improve their lives.”
Starr’s 2014 survey of 11,505 workers found that only 10 percent had negotiated their non-compete agreements, and most received no additional training or benefits in exchange for signing away their post-employment rights. Indeed, he says, “Many workers did not realize they had signed agreements because they were included in a stack of forms they completed after accepting the offer or after joining the firm.”
Forty percent of employees have signed agreements at some point in their careers, Starr’s research showed.
The use of non-compete agreements has serious long-term consequences. Workers cannot bargain for higher wages and improved benefits because employers know they cannot leave for similar jobs elsewhere. Wages stagnate, making it difficult for workers to keep up with the rising cost of living and to save for their children’s education or their own retirement.
“Many workers, especially women and people of color who have suffered sexual harassment and other forms of workplace abuse, stay in dead-end jobs because they lack savings to support themselves during the period of no wages,” says Orly Lobel, professor of labor and employment law at the University of San Diego School of Law.
Employees who do leave often start over in new occupations and industries where their skills are less applicable and their pay lower, Lobel adds.
Non-compete agreements also keep employees from starting their own businesses, which hits individuals hard because they often can earn more as entrepreneurs than they do as employees, she explains.
“The overall labor market suffers,” Lobel says. “Employers spend more time and effort finding the employees they need. High-growth regions that depend on start-ups are deprived of the workers they need to get their products on the market in record time.”
For eight years, Brendan Lynch, an attorney with Community Legal Services in Philadelphia, championed the cause of low-wage workers saddled with non-compete agreements. He considers them an invisible population.
“We usually learn that our clients have non-compete agreements when they come to us for help with housing, consumer, and other matters, or when they have received a letter from a former employer threatening to enforce the agreement,” says Lynch, whose nonprofit group has served more than one million low-income residents since its 1966 founding by the Philadelphia Bar Association.
Low-wage workers eager to land jobs don’t scrutinize the huge stack of forms employers have them sign and don’t try to negotiate better terms the way engineers, executives, and other highly paid workers do.
While it’s unlikely that a court would order an employee who cleans offices or buses dishes in a restaurant to pay damages and legal fees to a former employer for violating a non-compete agreement, the mere possibility of being taken to court is enough to keep home health care aides, janitors, and fast-food workers trapped in jobs they want to leave, Lynch says.
Single parents struggling to feed their children and couples worried about paying next month’s rent don’t have the savings or emotional stamina to get through the litigation, which could drag on for years.
Non-compete agreements also intimidate prospective employers. Lynch cites a case in which a school refused to hire his client after the principal received a letter from the former employer.
“The school didn’t want to incur legal expenses fighting the janitorial service,” Lynch says. “It was cheaper and easier to give the job to someone else who had the same skills and similar experience.”
Although home health aides are in great demand because of the aging population and expansion of Medicaid, they often find that non-compete agreements prevent them from earning higher wages.
“Home health care is an occupation where it is important for the employee and employer to trust each other and get along because the work involves intimate tasks like bathing and changing clothes,” Lynch says. “Some home health care aides who have non-compete agreements end up working indefinitely for employers who demean them.”
Not only are more employers requiring non-compete agreements, but an increasing number of workers are being sued by former employers for breach of non-compete agreements. According to a report in The Wall Street Journal, the number of workers sued by former employers over non-compete agreements increased 61 percent from 2002 to 2013.
Despite the dire impact on their lives, most workers assume non-compete agreements are valid even when they are not, says Russell Beck, an attorney with Beck Reed Riden LLP in Boston, Massachusetts.
“Even in states like California, Montana, and Oklahoma, which don’t recognize or enforce non-compete agreements, workers won’t challenge agreements in court because they can’t afford to hire a lawyer and don’t have the funds, time, and emotional stamina to get through the litigation, which can take years,” Beck says in a phone interview.
Fortunately, says Beck, governmental efforts to solve the problem have increased since 2016, when the Obama Administration issued a call to enact reforms. Studies showed that the prevalence of non-compete agreements was hurting the wages of workers earning less and impeding the growth of regional economies.
“In 2019 alone, more than ten states passed legislation,” says Beck, who completed a fifty-state analysis of laws to curb abuses.
State attorneys general have launched investigations of the misuse of non-compete agreements by fast-food chains and other businesses that employ large numbers of low-wage workers. Bipartisan legislation has also been introduced in Congress to prohibit the use of non-compete agreements in almost all situations.
Some states have tried to protect low-wage workers by restricting the use of non-compete agreements to higher-wage earners. Others have excluded young people in internships and workers in certain fields like health aides.
“A few states like Massachusetts and Washington require employers to pay a percentage of the employee’s salary during the period when the non-compete agreements prohibit him or her from working for a competitor,” Beck adds.
Some state attorneys general are adding their legal muscle to efforts to protect low-wage workers from the harmful effects of non-compete agreements.
In 2016, the attorneys general of the states of Illinois and New York each sued Jimmy John’s, an Illinois-based sandwich company that has 2,800 stores across the nation. Its non-compete agreement prohibited all employees from working for any business that earned more than 10 percent of its revenue from selling “submarine, hero type, deli style, pita, and/or wrapped or rolled sandwiches” within three miles of any of the Jimmy John’s shops for two years.
“In addition to requiring Jimmy John’s to notify all current and former employers that the non-compete agreements were unenforceable, the settlement was designed to protect future workers,” says Jane Flanagan, former chief of the Workplace Rights Bureau of the Illinois Attorney General’s office.
Jimmy John’s had to remove non-compete forms from packets given to newly hired workers and require franchise owners to rescind any additional non-compete agreements they may have used based on the Jimmy John’s corporate model, Flanagan says.
To build public awareness of the misuse of non-compete agreements, Jimmy John’s agreed to pay the state of Illinois $100,000, which the attorney general’s office is using to educate employers about what is legally permissible, says Flanagan, now a fellow at the Open Society Foundations and a visiting scholar at the Chicago-Kent College of Law at the Illinois Institute of Technology.
The attorneys general of Illinois and New York conducted a similar investigation of WeWork, which provides shared office space for rent and associated services to clients in the United States and internationally.
They found that the New York City-based company’s non-compete agreement prevented nearly all of its 3,300 employees nationwide from taking jobs with competitors for two years. They worked out a settlement that removed 800 rank-and-file employees in New York City and an additional 600 across the country from the non-compete restrictions.
“Many of these employees were cleaners, mail associates, and executive assistants, some of whom earned as little as $15 an hour,” says Terri Gerstein, who led the investigation by the New York State Attorney General’s office and is now the director of the State and Local Enforcement Project at the Harvard Law School’s Labor and Worklife Project.
“The agreement violated basic fairness,” Gerstein says in a phone interview. “Just because an employee works for a company now doesn’t mean that he or she should do so forever. The mere mention of a non-compete agreement was enough to keep some terrified employees in dead-end jobs for years.”
One countervailing force against the abusive use of non-compete agreements has been media exposure. In 2015, Amazon, the nation’s largest online retailer, removed a non-compete clause in its employment contract for warehouse employees the day after The Verge reported that the clause could have kept these workers, including temporary ones, unable to work for competitors for up to eighteen months. The workers typically earned $10 to $12 an hour.
“Exposure by the media increases the awareness that non-compete agreements are unfair and that state and national legislation is needed to get rid of the abuses,” Lynch says.
Advocates have urged the Federal Trade Commission (FTC) to use its power to enforce antitrust laws to ban non-compete agreements. In March 2019, the Open Markets Institute, a Washington, D.C.-based nonprofit that promotes awareness of the economic dangers of monopolies, presented a petition signed by the AFL-CIO and more than sixty other labor organizations, public interest groups, and legal scholars.
Seven Democratic Senators, including Elizabeth Warren of Massachusetts and Amy Klobuchar of Minnesota, signed a letter urging the FTC to “use its rule-making authority along with other tools to combat the scourge of non-compete clauses rigging our economy against workers.”
Eighteen state attorneys general, all Democrats, also urged the FTC to crack down on the use of non-compete agreements. “We are interested in ensuring that our economies prosper in an environment free of anticompetitive restraints,” they wrote.
But advocates face an uphill fight because three of the five Federal Trade Commissioners are Republicans. On January 9, 2020, Commissioner Noah Joshua Phillips, who was appointed by President Trump, said that he had reservations about whether the FTC had the authority to issue such a rule.
Congress may be more receptive.
“There is a bipartisan consensus evolving in Congress that scarcely seemed possible in 2015 when we were government lawyers coordinating investigations of the Illinois and New York attorneys general,” says Gerstein.
In October 2019, Senators Chris Murphy, Democrat of Connecticut, and Senator Todd Young, Republican of Indiana, introduced the Workforce Mobility Act, which would prohibit the use of non-compete agreements in almost all settings. The bill, which has been referred to the Senate Committee on Small Business and Entrepreneurship, would ban non-compete agreements for all workers and delegate enforcement and reporting responsibilities to the FTC and the U.S. Department of Labor.
“One of the strongest arguments for Congress passing this bill is the positive effect that eliminating non-compete agreements has on workers’ wages,” says Flanagan.
A 2019 study by professors Starr of the University of Maryland and Michael Lipsitz of Miami University found that wages of hourly workers in Oregon increased by 2 to 3 percent on average after the state banned non-compete agreements in 2008. Positive wage effects occurred across the age, education, and wage spectrums, but the greatest gains were for female workers and in occupations where non-compete agreements were more common.
“Companies are not playing by the rules,” says Bob Ferguson, Washington state attorney general, “so our office is pursuing a variety of initiatives to ensure that workers won’t be exploited.”
One of the most widespread abuses is the use of non-poaching agreements by franchises, which prevent workers from leaving one franchise and moving to another within the same chain, which offers higher pay or a better work schedule, Ferguson explains.
More than 150 corporate chains have reached settlements with Ferguson’s office to get rid of non-compete agreements, including fast-food restaurants, painting companies, cleaning services, and shipping and business services.
“These [decisions] are a win-win for workers as well as states because they ensure that our future economy will be healthy,” Ferguson says.