February 2023 | Volume 14, Issue 7

Read the full article on USA Today.

According to the article, the Federal Trade Commission has proposed a new rule that would bar the use of noncompete clauses in employment contracts. 

About one in five workers have signed these clauses, which prevent them from joining a competing business or starting their own business for months or even years after leaving a company.

A small number of states have banned non-competes. Others have restricted their use, particularly for low-wage hourly workers.

Researchers say there is another reason to eliminate these agreements: They may disproportionately harm women and people of color. What's more, getting rid of them could lift wages for underrepresented groups.

“There are now several studies which suggest that noncompete agreements more strongly affect women and people of color,” said Evan Starr, assistant professor of economics at the University of Maryland. 

Employers say noncompetes protect trade secrets and other confidential business information while helping them retain workers in a tight labor market. Such clauses also encourage companies to invest in training and career development, they say.

The FTC argues that noncompete agreements artificially suppress wages, even for workers who do not have them, decrease competition in the labor market and kill innovation.

“These restrictions can undermine core economic liberties, burdening Americans’ ability to freely switch jobs,” said FTC Chair Lina Khan. 

Orly Lobel, law professor and director of the Center for Employment & Labor Policy at the University of San Diego, says it is not just about giving workers more choices. Banning noncompetes also can improve working environments.

“The FTC talks about the $300 billion that can be gained by having true competition in the talent market, but it’s really also about gaining better workplaces,” said Lobel, author of “The Equality Machine: Harnessing Digital Technology for a Brighter, More Inclusive Future.”

Bridget Mroczkowski, a customer service representative in Wisconsin where noncompetes are legal, works in an industry dominated by women. She had to sign a non-compete agreement as a condition of employment even though she says she's not privy to "any trade secrets or things happening at a higher level."

While most noncompetes tie up executives and skilled professionals, about 32 million Americans are bound by these clauses, not just high earners. A 2019 survey by the Economic Policy Institute found that nearly 30 percent of the businesses where the average wage was less than $13 an hour used non-compete agreements. 

Mroczkowski says her pay is below the market rate and has not kept up with inflation. If she was not held back by a noncompete, she says, she could double her income by moving to a rival company. Right now, to boost her salary she says she would have to change industries.

Noncompete agreements are often a condition of accepting a job. Fewer than 10 percent of workers negotiate these agreements. 30 percent to 40 percent of workers are asked to sign the agreements after they have already taken the job and have less negotiating power. 

“When you have the ability to move jobs with a skill set behind you, you can always make more, and it at least gives you more bargaining power in your current position," Mroczkowski said.

Workers bound by noncompetes either have to give up job opportunities or sit out the workforce for an extended period, says Najah Farley, senior staff attorney with the National Employment Law Project.

“With workers of color, particularly Black workers who are already subject to severe wealth inequality in this country, you are definitely putting them in a situation that is untenable,” Farley said. “They already have less wealth and less ability to withstand those kinds of economic barriers.” 

Women and people of color, who face historic disadvantages in the workplace, including wide pay gaps, are less likely to negotiate or violate noncompetes than their white counterparts, research shows.

In states that enforce noncompetes, women are also less likely than men to risk leaving their jobs if they are bound by one of these clauses. 

“Lower-wage earners and people from minority and economically disadvantaged backgrounds largely don’t have the experience, time, money or access to counsel to challenge noncompetes,” said Des Lafleur, a clinical teaching fellow at UC Berkeley School of Law.

Ayesha Hardaway, associate professor at Case Western Reserve University School of Law, says she represented a 30-something Black woman working as home health aide and supporting her teenage son on $10,000 a year who was sued for switching employers. 

The home health agency sought damages equivalent to the former employee's annual salary for violating a noncompete agreement.

With Hardaway’s help, the lawsuit was resolved. But other employees were not so lucky and had default judgments levied against them, according to Hardaway.

“The consequences can be devastating,” Hardaway said.

Strict enforcement of noncompete agreements lowered the wages of women and people of color by twice as much as white men, one study found.

Marcy Karin, a law professor at the University of the District of Columbia, draws parallels between noncompete clauses and wage contracts during the Reconstruction Era that former slave owners used to exploit freed Black workers. 

“While it may not be as overt today, structures still exist where some workers are stuck, without power to change jobs or negotiate better work conditions and in situations where employers are empowered to exploit them. The workers in this situation are disproportionately Black, indigenous, and other people of color,” Karin said.

If non-competes were banned, would wages for women and workers of color rise?

“Our research suggests that banning non-competes would not only raise workers’ wages overall but also reduce wage gaps by race and gender,” said Matthew Johnson, assistant professor of economics at Duke University. 

According to the study, the earnings gap between white men would narrow by 3.6 percent for non-Black, non-white men, 4.6 percent for Black women, 5.6 percent for white women, 8.7 percent for Black men and 9.1 percent for non-Black, non-white women.

Discussion Questions

  1. What is a non-compete agreement?
    A non-compete agreement is a contract between an employer and an employee that is typically signed at the start of their business relationship (although it may be signed after employment begins) and prohibits the employee from competing with the employer either directly or indirectly for a specific time after employment has terminated.

    Although the contents of a non-compete agreement may vary from company to company, they typically attempt to prohibit the employee from: (1) working for a competitor; (2) starting a company that offers the same goods or services; and/or (3) recruiting former colleagues to join their new business.

    States have varying approaches regarding the enforceability of non-compete agreements. Some states view them as overly restrictive on competition and only enforce them in limited situations or not at all.

    In states that allow non-compete agreements, courts use several factors to determine the enforceability of a specific agreement, including: (1) whether the non-compete agreement is needed to protect an employer’s legitimate business interest (e.g., confidential business information); (2) whether the non-compete agreement is limited to a specific geographic location (city, county, state, etc.); and (3) whether the non-compete agreement is supported by consideration, meaning the employee receives some benefit (e.g., a better job, greater compensation, or stock options) for entering the agreement.
  2. Based on the information presented in the article, and in your reasoned opinion, do noncompete agreements adversely impact women and people of color?
    In your author’s opinion, based on the information presented in the article, it is difficult to conclude definitively that noncompete agreements adversely impact women and people of color. Although the article indicates the result of “several studies” indicating that such agreements do adversely impact women and people of color, there is no indication of the methodology of the studies or comprehensive data. The most compelling information presented in the article is from Matthew Johnson, assistant professor of economics at Duke University, who states that “Our research suggests that banning noncompete (agreements) would not only raise workers’ wages overall but also reduce wage gaps by race and gender,” claiming that the earnings gap between white men would narrow by 3.6 percent for non-Black, non-white men, 4.6 percent for Black women, 5.6 percent for white women, 8.7 percent for Black men, and 9.1 percent for non-Black, non-white women.
  3. Do you support or oppose the Federal Trade Commission’s proposed new rule that would bar the use of noncompete clauses in employment contracts? Explain your response. 
    This is an opinion question, so student responses may vary. In your author’s opinion, the most compelling argument in favor of noncompete clauses in employment contracts is based on the principle of freedom of contract. However, given the often-remarkable disparity in bargaining power in the employer-employee relationship that favors employers, your author favors at least “strict scrutiny” by courts in terms of evaluating the time and geographic reasonableness of non-compete agreements, if not an outright ban as proposed by the FTC.