“Many times, a noncompete agreement isn’t presented to an employee until their first day on the job. William Potter/Getty Images
If you’re working for a company you don’t like and decide to work for its competitor, will that first company come after you for switching jobs? That might depend on whether you signed a noncompete agreement.
A noncompete agreement is a type of contract that prevents an employee from working for a competitor within months or even years after leaving the company. In other words, noncompete clauses are designed to protect an employer against workers taking their talents and trade secrets to the competition.
That might make sense for high-paid corporate executives, TV anchors or tech workers, whose sudden departure to the competition would pose a real threat. But the crazy thing about noncompete agreements is that American employers have asked all types of workers at all wage levels to sign them: home health workers, sandwich shop employees, even dog walkers.
According to 2020 data published in the Journal of Law and Economics, around one in five American workers are bound by a noncompete agreement. In early July 2021, President Joe Biden signed an executive order calling on the Federal Trade Commission (FTC) to ban or limit the use of noncompete agreements in employee contracts.
"You’ll find noncompete agreements in every corner of the U.S. labor market," says study co-author Evan Starr, an assistant professor of management and organization at the Robert H. Smith School of Business at the University of Maryland. "They’re being signed by interns, minimum wage workers, even volunteers for nonprofits in states like California that won’t even enforce noncompete agreements."
According to Starr’s research, nearly 40 percent of 11,505 U.S. workers he surveyed have signed a noncompete agreement at some point in their careers, and 18 percent are currently bound by one. That includes one-third of workers earning $40,000 or less. Another study by the Economic Policy Institute found that 29 percent of employers paying less than $13 an hour required their workers to sign noncompete agreements. Of the folks in the top tier of their study (those earning $22.50 and above), 36.5 percent had signed noncompetes.
Do Noncompete Agreements Serve a Legitimate Purpose?
The classic argument in favor of noncompete agreements is that they take some of the risk out of hiring and training new employees. Companies invest time and resources in training new workers, and part of that training includes sharing inside information, maybe even trade secrets, about how the companies do business.
"If the worker is allowed to walk across the street and join a competitor, then that puts the firm at a competitive disadvantage," says Starr. "The company had to create that information and spend lots of money developing it."
As the pro-business Maryland Chamber of Commerce put it, "Noncompete agreements are essential to the growth and viability of businesses by protecting trade secrets and promoting business development."
Another argument in favor of noncompete clauses is that workers aren’t forced to sign them. They can be negotiated as part of the overall employment contract. If a worker feels like they’re giving up too much by signing a noncompete clause, they can ask for a higher salary or walk away.
In reality, through, very few people ever pause to consider the ramifications of signing a noncompete agreement and ever fewer are in a position to negotiate.
"Less than 10 percent of workers negotiate over their noncompete agreement," says Starr. "More than 85 percent of the time, when a worker is presented with a noncompete agreement, they simply sign it."
Do Companies Really Enforce Noncompete Agreements?
If you’re one of the millions of Americans who have signed a noncompete agreement, you might assume that very few of these contracts are ever enforced. Companies would only go after the big fish, right? Nope.
"There are about 1,000 noncompete lawsuits a year and you’ll find all sorts of workers that you’d never expect to be in the legal record," says Starr. A Wall Street Journal analysis found that noncompete lawsuits increased by 60 percent from 2002 to 2013.
Consider the home health aide who was sued by his Pittsburgh-based agency when he tried to leave and work for a rival company. Or the famous case of the janitor who was sued by her billion-dollar employer, Cushman & Wakefield, when she tried to work for a rival cleaning business. (The company dropped the case after a public outcry).
As of right now, various types of noncompete agreements are enforceable in 47 states. Only California, North Dakota and Oklahoma have outlawed noncompetes for all workers. A handful of other states, like Maryland, have also banned noncompete agreements for low-wage workers. In Florida, however, you can still be held to a noncompete agreement even if you were fired from your job, Starr says.
The truth is that relatively few noncompete lawsuits ever go to court. The very existence of these noncompete agreements, and the broad language they use, is usually enough to intimidate workers, whether you are a janitor or a manager, from leaving for a better-paid job with the competition.
One such contract was signed by a clerk with a Philadelphia home health agency. The five-page contract prohibited the employee from working for any of its clients in a 35-mile (56-kilometer) radius within five years of leaving the job, and to pay the company’s legal fees if the case went to court.
"How many of these workers have the wherewithal to fight a legal battle?" asks Starr, who says that workers who dare to leave for greener pastures will receive threatening letters from the company’s lawyers. "Ninety percent of the time, these threatening letters tend to resolve the issue. What you see in the courts is a small, small sliver of what’s actually going on."
Noncompete agreements are not only bad for the workers who sign them, argues Starr, but also for the entire U.S. labor market, including employers.
"Let’s say that in a certain market sector, 50 percent of the workers are bound by a noncompete agreement," says Starr. "If you’re a firm trying to fill a position, it’s going to be really hard to hire an experienced worker, because everybody’s bound by noncompete agreements."
The negative effects of noncompete agreements are even felt by workers who aren’t bound by them. The mere existence of noncompete agreements "gums up" the labor market, Starr’s research shows, driving down wages, slowing the hiring process, and making it less likely to receive a job offer.
Will Biden’s Executive Order Change Anything?
The FTC now has to consider how aggressively it wants to take on noncompete agreements. It could ban them from being used in low-wage jobs, which other states have done, or it could impose rules to make the process more transparent. For example, lots of workers are asked to sign noncompete agreements on their very first day on the job when they’ve already negotiated their pay and benefits. The FTC could require early notice for such agreements.
Starr believes that in most cases, noncompete agreements aren’t necessary at all. If a company really wants to protect its trade secrets, then have workers sign nondisclosure agreements (NDAs). If a business wants to protect its investment in clients, then have workers sign a nonsolicitation agreement, which would forbid an employee from soliciting customers of the business they just left for a period of time. For job sectors that require months or years of training, there are even contracts that require a worker to pay back a portion of their training costs if they leave within two years.
"The key difference is that all of those other agreements are directly tied to the interest that the business is trying to protect," says Starr, "but unlike noncompete agreements, they don’t restrict where workers can go."
Now That’s Interesting
Judges generally stick to the "janitor rule" when determining the enforceability of a noncompete agreement. A contract is unenforceable if it’s so broad that it prevents a worker from taking any job with a competitor, including a janitor.
