Ban ‘noncompetes’ for lower and middle income workers

The Federal Trade Commission’s proposal to ban noncompete agreements lowand middle-income workers would be an economic game changer, affecting up to one-fifth of American workers. Noncompetes forbid workers from starting a similar company or working at a rival firm for up to several years.

Noncompetes have become draconian, sidelining workers for longer periods of time and restricting employees from working in ever-larger geographical areas. Today, nearly 1 in 5 U.S. workers are asked to sign a noncompete. Even some hourly workers at fast-food chains have had to agree to them. In an eye-popping example, workers who made sandwiches at Jimmy John’s had to sign noncompetes saying they would not take a job at a rival firm for two years. (The company was forced to drop it.)

Banning noncompetes for most workers has substantial bipartisan support, because it is justified by research and real-world experience. Noncompetes depress wages, hamper people’s ability to change jobs and have a “chilling effect” on entrepreneurship. A free-market economy works better when workers can take their talents to the places they can do the most good.

Workers need to be able to change jobs — and even industries — as the economy evolves. Moreover, workers earning less than six figures don’t have the clout to negotiate the terms of a noncompete or hire lawyers to read over every paper they sign when taking a job. From an employer perspective, it’s difficult to argue that someone paid below an executive salary is so critical to a company that they should be barred from moving on and working elsewhere.

The U.S. economy is suffering from a lack of dynamism. This century there’s been a surprising decline in the number of Americans starting businesses and moving to different states in pursuit of economic opportunities. Meanwhile, many companies are also struggling to find enough workers. Noncompetes make these problems worse.

Opponents of any FTC ban argue that companies need to protect trade secrets and that firms won’t invest in worker training without noncompetes. But if companies want to protect trade secrets, there’s a better way: nondisclosure agreements. If companies have their workers take a special course or program, they can have employees sign a “training repayment agreement,” in which workers agree to stay for a certain amount of time in exchange for the company funding the training.

The FTC proposes a partial ban. California has had a total ban in place for decades, yet Silicon Valley has still thrived. Advocates for a full ban point out that high-wage workers, especially in tech and medicine, are often the most likely to leave and start their own company, and the societal benefits of their entrepreneurship can be large. But many of these workers have the clout and knowledge to negotiate any noncompete arrangements up front, before they take a job, making federal intervention less necessary.

In an ideal world, Congress would pass legislation banning noncompetes for most workers. Because that’s unlikely, the FTC should move ahead.