Noncompete clauses hold workers back

Rare is the public policy that improves equality and economic growth simultaneously. Luckily, Connecticut has a chance to enact just such a policy: the state Legislature is considering a bill (HB 6913) that would narrow the range of enforceable noncompete clauses in the state. The state Legislature should pass this bill because it would benefit Connecticut’s workers and innovation ecosystem. In fact, the Legislature should make the bill more restrictive, if possible. The only parties who stand to lose from the bill are employers who enjoy unfair bargaining power over their employees in the status quo.

Connecticut is one of the most antiworker states when it comes to noncompetes. According to Beck Reed Riden LLP, it is one of 47 states that enforce noncompetes in some form and one of 27 that enforce noncompetes when an employee is terminated without cause. Economist Evan Starr uses a more quantitative approach: his index rated Connecticut the second highest noncompete enforceability in the nation in 2009, up from 10th in 1991.

Connecticut’s HB 6913 would narrow, but not eliminate, noncompetes in the state. The bill would allow noncompetes only in situations where the employee makes more than twice the minimum wage, the employee terminates the employment relationship and the noncompete does not restrict the employee for more than one year (or two years if the employer provides “garden leave” for at least one year, i.e., compensation at the employee’s base salary and benefits after termination).

This bill would make progress in reducing the scope of noncompetes, especially in making it much more costly for employers to use them with lowwage workers. But the bill should go further. For instance, it could raise the wage threshold to triple-minimum wage and mandate garden leave, or other compensation, for noncompetes of any duration, as the recent Massachusetts law has done.

Economic evidence supports reducing noncompete enforceability in Connecticut. Workers’ wages and returns-to-tenure would increase. In other words, the bill would raise both the level and the growth rate of wages. This benefit would also accrue to workers who are not currently bound by noncompetes. Startup activity would increase, as measured by firm creation, patent activity and job creation in newly created firms (the empirical evidence focuses especially on venture-capitalbacked, high-technology sectors).

Workers would also be more likely to change jobs, particularly those who specialize in technical fields. As they change jobs, workers with innovation potential (as measure by patent activity)

Startup activity would increase, as measured by firm creation, patent activity and job creation in newly created firms.

would be more likely to remain in the state and in the same industry. Amid high enforceability, workers tend to either move states in order to remain in the same industry or move out of their industry in order to remain in the same state. This is important because the two latter outcomes tend to decrease the benefits from agglomerations, or “clustering,” which is how cities increase productivity.

This final point highlights how the recent Massachusetts legislation on noncompetes affects Connecticut. Because workers under noncompetes switch states in order to remain in their industry, Connecticut might have previously received workers moving from Massachusetts. But now, because the out-migration response from Massachusetts will essentially vanish, Connecticut is more likely to suffer a “brain drain.” Thus, Massachusetts’ legal change has increased the economic cost of Connecticut’s current noncompete regime.

Connecticut has a rare chance to improve workers’ bargaining power and increase the state’s innovation potential. The Legislature should pass HB 6913, and, if possible, further strengthen the bill’s restrictions on noncompetes. Allowing workers to use their talents more freely and forcing employers to compete for those talents will improve dynamism in Connecticut’s economy.