Noncompete agreements, or “noncompetes,” bind about one in five American workers. These contracts are signed at the beginning of employment and bar individuals from leaving their employers to work for their competitors or start their own businesses within a specific geographic area or amount of time.
Some proponents of noncompete agreements for less-educated, lower-wage workers argue that they allow businesses to entrust workers with sensitive information and invest in their skills without the risk of losing them. Proponents also assert that job seekers asked to sign these contracts can negotiate for higher compensation in return.
Opponents of these agreements contend these workers sometimes only find out they are expected to sign a noncompete agreement after they have been hired, inhibiting their ability to negotiate for a higher wage in return for signing the contract. Additionally, low-wage workers without access to sensitive information or technical training may be asked to sign these agreements, preventing them from moving to new jobs and limiting the growth of their incomes.
Yet information on the use of noncompete agreements, as well as their impact on labor market outcomes, is limited because employee-level noncompete data are not generally collected. To fill this gap, Evan Starr at the University of Maryland and J.J. Prescott and Norman Bishara at the University of Michigan developed and administered a survey to more than 11,000 labor force participants throughout the United States. These data were weighted to ensure national representation and addresses previously unanswered questions concerning the noncompete contracting process and whether such agreements are related to higher wages and job satisfaction.
The three coauthors find that noncompetes may be associated with worse labor market outcomes for less-educated, low-wage workers who learn about the agreements after being hired. The Federal Trade Commission relied in part on this research in its move last week to ban all noncompetes, but the debate over these contracts is far from resolved.
Key findings
- About 18 percent of the US labor force, or 28 million individuals, currently work under a noncompete agreement, and 38 percent of workers have signed a contract with a noncompete clause before. Most of these agreements last less than two years but have a broad geographic scope, sometimes including the entire country. One out of every five workers limited by a noncompete agreement does not know its specific limitations.
- Workers who sign noncompetes are more likely to be highly educated, higher earners, and employed at for-profit businesses, but 14 percent of workers without a bachelor’s degree and 13 percent of workers earning less than $40,000 per year are also bound by these agreements. This information contradicts the assertion that noncompetes are only used for high-level workers with technical knowledge who can negotiate for increased compensation in return.
- These workers are also more likely to express uncertainty regarding whether they have signed such a contract. Almost 45 percent of workers without a bachelor’s degree reported that they do not know whether they signed a noncompete agreement in the past, compared to about 20 percent of respondents with a bachelor’s degree.
- Workers without a bachelor’s degree are half as likely to negotiate the terms of their noncompete agreement than those with a degree. More than 93 percent of workers without a bachelor’s degree did not negotiate their compensation or benefits after they were asked to sign a noncompete. Some chose not to negotiate because they believed that the terms were reasonable, while others assumed that it wasn’t possible to negotiate noncompetes or feared they would create tensions with their new employers.
- Workers who are asked to sign noncompete agreements after accepting a job offer are also less likely to negotiate the terms of these contracts. These workers also have lower earnings, are less likely to have sensitive information shared with them, do not receive more training, and on average are less satisfied with their jobs compared to those workers without noncompete agreements.
- As a result, low-wage workers and those without college degrees who are asked to sign noncompetes after being hired are unable to negotiate for higher wages or better benefits. They also do not benefit from specialized training that might provide better job opportunities in the future.
- In the 46 states that enforce some or all noncompete agreements, employers are more likely to provide workers with training, but these workers don’t earn higher wages compared to those in states where noncompetes are unenforceable. This further contradicts the assertion that workers, including low-wage workers, who legally waive their right to seek employment in certain circumstances benefit by negotiating higher compensation in return.
Policy and practice implications
WorkRise has identified the following implications for policy and/or practice:
- State labor law enforcement offices should provide accessible information regarding the negotiation and enforcement of noncompete agreements. State governments have webpages dedicated to labor standards and workers’ rights, yet they don’t mention these common contracts. Enforcement laws vary by state, and workers should be able to easily learn their state’s definition of a noncompete clause, whether it can be negotiated, and how it is enforced.
- Given the findings of this study, businesses that negotiate noncompete agreements with prospective workers before they are hired due to the need to protect sensitive proprietary information should explore other strategies to protect their interests. Businesses can use tools such as nondisclosure agreements, nonsolicitation agreements, and trade secret law instead of noncompetes to minimize the risks associated with disclosing sensitive information to workers.
- Policymakers should consider legislation promoting the negotiation of noncompete agreements at the beginning of the hiring process, and limiting their use in situations where workers may not have the knowledge or resources to negotiate. By restricting the use of noncompetes to higher-income earners and requiring employers to disclose their expectations to prospective workers signing noncompete agreements before extending job offers, legislators can ensure that all parties enter these contracts willingly. In Colorado, for example, noncompetes are only legal for workers earning more than $101,250 annually.
The future legality of noncompetes stands on shaky ground. The Federal Trade Commission last week issued a rule banning all noncompete agreements, though the decision was immediately challenged in court by the US Chamber of Commerce and other business groups. A year ago, the National Labor Relations Board issued a memo stating that these contracts unlawfully limit worker rights except in limited circumstances. And some states, including California and Colorado, already ban or restrict the enforcement of noncompete clauses.
Businesses that use these contracts, however, will be watching carefully for new legislative and judicial openings to continue their use in the US labor market. The governor of New York, for example, recently vetoed legislation barring noncompetes for being too restrictive after meeting with representatives from various business groups.
Whatever the outcomes of those challenges, businesses should consider whether they will be able to continue enforcing noncompete agreements in the future, and then identify alternatives. And policymakers and worker advocates should further refine how to guard businesses against legitimate risks as they invest in the knowledge and skills of their employees without harming less-educated workers and low-wage workers who are unaware of their ability to negotiate.