The Federal Trade Commission has proposed a new rule that would bar the use of non-compete clauses in employment contracts.
About 1 in 5 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 noncompetes. Others have restricted their use, particularly for low-wage hourly workers.
Researchers say there’s 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.
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What is a noncompete agreement?
Employers say noncompetes protect trade secrets and other confidential business information while helping them retain workers in a tight labor market. These 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’s not just about giving workers more choices. Banning noncompetes can also 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.”
How do noncompetes harm women and people of color?
Bridget Mroczkowski, a customer service representative in Wisconsin where noncompetes are legal, works in an industry dominated by women. She had to sign a noncompete agreement as a condition of employment even though she says she's not privvy to "any trade secrets or things happening at a higher level."
While most noncompetes tie up executives and skilled professionals, some 32 million Americans are bound by these clauses, not just high earners. A 2019 survey by the liberal Economic Policy Institute found that nearly 30% of the businesses where the average wage was less than $13 an hour used non-compete agreements.
Mroczkowski says her pay is below market rate and has not kept up with inflation. If she was not held back by a noncompete, she could double her income by moving to a rival company. Right now to boost her salary, she says she'd have to change industries.
Why do workers sign noncompetes?
Non-compete agreements are often a condition of accepting a job. Less than 10% of workers negotiate these agreements. Some 30% to 40% of workers are asked to sign the agreements after they’ve already taken the job and have less negotiating power.
“When you have the ability to move jobs with a skillset behind you, you can always make more and it at least gives you more bargaining power in your current position," Mroczkowski said.
What does noncompete research show?
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 non-competes 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.
Noncompetes are tougher on women, people of color
“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’s law school.
Ayesha Hardaway, associate professor at Case Western Reserve University School of Law, says she represented a thirty-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.
Do noncompetes depress wages for women and people of color?
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.
Would a ban on noncompetes lift wages?
If noncompetes were banned, would wages for women and workers of color go up?
“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% for non-Black, non-white men, 4.6% for Black women, 5.6% for white women, 8.7% for Black men and 9.1% for non-Black, non-white women.
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