Non-compete clauses hit blue collar hard
US workers find there could be many a legal landmine to overcome for a new job
eith Bollinger’s paycheque as a factory manager had shrivelled after the 2008 financial crisis, but then he got a chance to pull himself out of recession’s hole. A rival textile company offered him a better job — and a big raise.
When he said yes, it set off a threeyear legal battle that wiped out his savings along the way. “I tried to get a better life for my wife and my son, and it backfired,” said Bollinger, 53. “Now I’m in my mid-50s, and I’m ruined.”
Bollinger had signed a non-compete agreement, designed to prevent him from leaving his previous employer for a competitor. These contracts have long been routine among senior executives. But they are rapidly spreading to employees like Bollinger, who do the kind of blue-collar work that President Donald Trump has promised to create more of. The growth of non-compete agreements is part of a broad shift in which companies assert ownership over work experience as well as work.
A recent survey by economists including Evan Starr, a management professor at the University of Maryland, showed that about one in five employees was bound by a non-compete clause in 2014. Employment lawyers say their use has exploded.
Russell Beck, a partner at the Boston law firm Beck Reed Riden who does an annual survey of non-compete litigation, said the most recent data showed that non-compete and trade-secret lawsuits had roughly tripled since 2000. “Companies of all sorts use them for people at all levels,” he said. “That’s a change.”
Employment lawyers know this, but workers are often astonished to learn that they’ve signed away their right to leave for a competitor. Timothy Gonzalez, an hourly labourer who shovelled dirt for a fast-food-level wage, was sued after leaving one environmental drilling company for another. Then there is Bollinger, whose long-running legal battle is full of twists and turns that include clandestine photography, a private investigator, a mysterious phone call and courthouse victories later undone by losses in appeals court.
Alan B. Krueger, a Princeton economics professor who was chairman of President Barack Obama’s Council of Economic Advisers, recently described non-competes and other restrictive employment contracts — along with outright collusion — as part of a “rigged” labour market in which employers “act to prevent the forces of competition.” By giving companies huge power to dictate where and for whom their employees can work next, non-competes take a person’s greatest professional assets — years of hard work and earned skills — and turn them into a liability.
Non-competes are but one factor atop a great mountain of challenges making it harder for employees to get ahead. Globalisation and automation have put American workers in competition with overseas labour and machines. The rise of contract employment has made it harder to find a steady job. The decline of unions has made it tougher to negotiate.
But the move to tie workers down with non-compete agreements falls in line with the decades-long trend in which their mobility and bargaining power has steadily declined, and with it their share of company earnings.
“People can’t negotiate when their company knows they won’t leave,” said Sandra E. Black, an economics professor at the University of Texas at Austin.
In a 2011 paper that surveyed technical workers who had signed non-competes, Matthew Marx, a professor at the Sloan School of Management at MIT, found that employers typically presented workers with non-compete contracts when the employees lacked negotiating leverage, on their first day at work, for instance. “By then, they had said yes to their company, and no to the other companies they were negotiating with,” Marx said.
Companies have always owned their employees’ labour, but today’s employment contracts often cover general knowledge as well. In addition to noncompete clauses, there are nonsolicitation and nondealing agreements, which prevent employees from calling or servicing customers they have worked with in the past.
There are nonpoaching agreements that prevent employees from trying to recruit old colleagues. Put it all together, and suddenly some of the main avenues for finding a better-paying job — taking a promotion with a competitor, being recruited by an old colleague — are cut off.
Natural reaction
Companies say this is a natural reaction in an economy that is more about knowledge and less about sweat. Data makes up a larger share of many companies’ assets, and the more people work around the clock, and remotely, often switching between company-owned and personal devices, the more difficult it becomes to guard it.
“When a person takes a trade secret and walks across the street to another company, how am I going to know that?” said Paul T. Dacier, a longtime technology executive. “And when I do find out, it’s too late.”
The problem is that it can be hard to distinguish true intellectual secrets from the accumulated skills that make workers more valuable. And since few companies want to lose good workers or give out huge raises, these agreements are making their way down the economic ladder to people like hairstylists and sandwich makers, far removed from what is thought of as the knowledge economy.
Economists have used that disparity to study how they affect businesses and the economy. The results are almost universally negative: Wages, employment and entrepreneurship are all diminished when workers have little leverage to bargain with their employer or leave a job for a better opportunity.
Non-competes damage regional economies as well. US states with strict enforcement end up suffering a brain drain, by encouraging their best and smartest workers to move elsewhere for better pay. The great counterexample, which comes up in just about every discussion of the subject, is the growth of Silicon Valley.
California law prohibits non-compete clauses, contributing to the inveterate poaching with which the state’s technology industry was founded.
It can be brutal for employers, but it helps raise wages and has created a situation where any company looking to hire a bunch of engineers in a hurry, be it an established giant or a start-up, feels it should locate there.
“It’s not just that it allows employees to leave their company for another job,” said Mark A. Lemley, a professor at Stanford Law School. “It allows them to leave to start new companies.” Recognising this, several states have moved to curb the use of non-competes.
This includes Democratic-leaning states like Massachusetts as well as Republican-leaning ones like Utah, which last year passed a bill limiting the scope of the agreements. Mike Schultz, the bill’s Republican sponsor, framed it with the most conservative of talking points: the right to work. “If an employer can fire anybody for any reason,” he said, “employees also need to have the right to walk.”