Why non-compete agreements are unfair to workers

Photo: John Partipilo/States Newsroom

Even some fast food workers have been forced to abide by non-compete clauses

Earlier this month, the Federal Trade Commission proposed a rule prohibiting employers from requiring employees to abide by non-compete agreements as a condition of employment.

The practice of requiring employees to sign a non-compete agreement is not new, but was traditionally required of higher-paid employees to prevent them from taking clients, trade secrets and resources from one firm to another. Unfortunately, it has become more common for low-paying employers such as retail stores and restaurants to require these agreements as well. In New York, for example, some Jimmy Johns franchises had been prohibiting former employees from working for similar restaurants within a three-mile radius for two years after leaving employment.

The only reason for a business to impose non-compete agreements on lower-paid employees is to make it more difficult for them to find better work.

A report from the Economic Policy Institute cites a finding that 51.6% of North Carolina employers require at least one employee to sign a non-compete agreement and 29% require all their employees to sign one. These percentages are among the highest of the larger states and underscore the pervasiveness of this practice.

In addition to being an obstacle to finding better work, non-compete agreements go against the idea that Americans can better their situations by seeking work with higher pay, better hours or a better work environment. Giving an employer power over where its employees can work even after they leave goes against the “free-market principles” that business groups promote.

In 2020, the Michigan League for Public Policy testified in support of a bill that would have prohibited the use of non-compete agreements for employees making wages at or below 138% of the poverty level (roughly $14.50 per hour at that time), although we believe the threshold should be significantly higher. In opposition, businesses argued that the bill “does not take into account any other factor than income, such as access to proprietary information, sensitive processes, technologies, trade secrets, competitive information or the like.”

The responses to this argument are:

Businesses can protect proprietary and other sensitive information with confidentiality agreements, which do not interfere with an employee’s right to seek other employment.If a business feels strongly that its interests would be better protected with a non-compete policy, it can pay its workers more than 138% of the poverty level.

The bill was not voted out of committee and received no further hearings, particularly as the urgency of responding to the pandemic pushed many non-emergency issues to the back burner. A similar bill was introduced during the 2021-22 session that had 36 co-sponsors, but did not receive a committee hearing at all.

Business groups objecting to the far-reaching aspects of the Biden administration proposal could meet worker advocates halfway and agree to a national wage threshold below which an employee cannot be required to sign a non-compete agreement. It appears that no such groups have put forth such a proposal.

One idea is to align the wage threshold for non-compete agreements to that for overtime exemptions. The current overtime threshold is $684 per week ($35,568 annually). While it can be argued that this threshold is too low for both overtime and non-compete agreements, it would be preferable to the lack of non-compete protections for low-paid workers now.

The FTC’s proposed rule would protect low-paid workers around the country. The commission estimates that each year its proposed rule would increase workers’ earnings by nearly $300 billion, save Americans up to $148 billion on health care costs, and double the number of companies founded by a former worker in the same industry. That would be good not only for workers, but for the economy as a whole.

Peter Ruark is a Senior Policy Analyst at the Michigan League for Public Policy and a contributor to the Michigan Advance, which first published this essay.

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Why non-compete agreements are unfair to workers