In a move intended to let workers jump from job to job more easily, the Biden administration plans to place greater limits on the enforceability of employee noncompete agreements.
In an executive order signed today, President Biden will direct the Federal Trade Commission to adopt new rules “banning or limiting” noncompetes, as part of a package of 72 measures, several of which seek to spur labor market dynamism at a time when companies report a record high 9.2 million vacant job openings.
Incoming FTC chair Lina Khan has in the past suggested that noncompetes were ripe for reconsideration. “By reducing the set of employment options available to workers, employers can suppress wages,” she and a coauthor observed in a 2020 University of Chicago Law Review article.
Noncompetes are typically executed at the time a new employee is hired, compelling them to promise they will not seek employment at (or start) a competitive firm for a period of time after they leave their current position. Critics say these restrictive covenants are generally less effective at protecting an employer’s intellectual property and instead have the effect of reducing employee mobility, thereby stifling competition for top-notch talent and curtailing wage growth.
“Noncompetes benefit old, failing companies that are afraid of losing employees and hurt young, vibrant companies that want to hire employees,” says Mark A. Lemley, a professor at Stanford Law School who specializes in technology innovation and is a critic of noncompetes. “States like California that already ban noncompetes have seen large increases in innovation because employees with a good idea are free to start a new company. The economic evidence is overwhelming that noncompetes interfere with innovation.”
Originally intended to provide companies with a way to protect scientific or technical trade secrets, noncompetes and other restrictive covenants (such as nonsolicitation agreements) have become ubiquitous in corporate America. A 2019 survey of employers published by the Economic Policy Institute found that nearly half of respondents said that some of their employees were covered by a noncompete, and 30% of respondents said that all employees were subject to such a provision. In a fact sheet announcing the new measure, the White House cited estimates that between 36 million and 60 million workers are currently party to a noncompete.
The common use cases for noncompetes has widened over time. Beyond shielding proprietary technical know-how, today these stipulations are increasingly justified as a way for a high-octane sales organization to retain representatives with valuable client relationships or for a hedge fund to keep employees familiar with sensitive investment information from decamping for another shop.
The reach of noncompetes has further widened as companies ranging from behemoths to nimble upstarts have expanded into so many different, overlapping businesses. In today’s market, where adversaries also are often channel partners, suppliers, joint venture partners, and/or even clients, the definition of what constitutes “direct competition” has itself become muddy, placing employees at a disadvantage when it comes to seeking a new position elsewhere while also complying with a blunt, boilerplate noncompete that may have failed to anticipate how a particular business would evolve.
The use of noncompetes has also cascaded from high-skill, high-wage jobs in engineering, technology, and finance, to service sectors such as medical and dental practices, retail, fitness and personal training, and even fast-food restaurants, where employers have strained to make a credible argument that precious trade secrets are imminently at risk.
In announcing the new policies, White House press secretary Jen Psaki noted this broadened use of noncompetes, and characterized the measure as making good on a campaign promise directed at the average worker. “Roughly half of private sector businesses require at least some employees to enter noncompete agreements, affecting over 30 million people. This affects construction workers, hotel workers, many blue-collar jobs—not just high-level executives,” Psaki said in a briefing.
Other policies likely to be included in the package would curtail so-called killer acquisitions of fledgling companies by industry incumbents; bolster worker rights in industries with only a few major employers; and prohibit employers from sharing salary data in a way that circumscribes workers’ ability to negotiate higher compensation. This “should help employees negotiate salaries and reduce pay disparities,” Lemley says. “At the very least, it will make clear what companies are behind the curve and what companies pay women less than men for comparable jobs.”
The Biden administration’s action on noncompetes comes at a time when several states have adopted similar measures. Oregon, Illinois, and Nevada recently passed a series of reforms meant to rein in noncompetes, especially for low-wage workers, and similar bills are being considered in a number of state legislatures as well as in the District of Columbia.
In addition to encouraging worker mobility, noncompete reform is intended to drive new company formation, a boon to employees who desire to leave a company to launch a startup in the same industry. Startup activity is seen by lawmakers as a driver of innovation and wealth creation. They point to the experience in California, one of three states that bans noncompetes, where companies expend less energy on trying to maintain a static workforce that locks people in and more energy on becoming an employer brand by creating incentives to retain employees through widespread equity participation and employee-centric corporate culture initiatives.
“Every economist who has studied the issue has found that California is more innovative than other states, and that a major driver of that innovation is the ability of employees to leave and start a new company at will,” Lemley says.
The Biden administration’s worker-friendly tack could accelerate the trend known as the “Great Resignation,” in which workers are emerging from the COVID-19 pandemic ready to mix it up career-wise. Nearly 4 million people quit their jobs in April, the latest month for which voluntary resignation data is available. The retail industry alone saw 649,000 workers quit, the largest monthly total since the Labor Department began tracking this information 20 years ago.
With job openings plentiful and the stock market closing the first half of the year on a buoyant note, economic confidence is rising fast. For the first time in a long time, employees appear to be poised to enjoy not just low unemployment but the possibility of significant wage growth at all levels, with some of the likeliest gains surfacing among workers in the manufacturing and service industries—a labor force that has sometimes been left on the sidelines of a growing economy.
Against this backdrop, noncompete agreements may be one of the few barriers standing between employers and a war for talent reminiscent of the booming job market of the late 1990s.
And the Biden administration is only too happy to sweep it away.
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