Noncompete clauses hurt workers and businesses

Why should your boss be able to stop you from getting a new job? There’s no good reason, which is why it’s good news that earlier this month, a bill was introduced in the Connecticut legislature to curb employer abuse of noncompete clauses in employment contracts, and a public hearing was held Tuesday.

The bill doesn’t go far enough to stop noncompete abuse, but it’s still a positive development. Noncompetes, which limit workers from getting a job with their employer’s competition for a set period of time, lock people into jobs they don’t want. Studies have shown that noncompetes reduce job mobility and suppress workers’ wages.

Workers almost never have the chance to negotiate over noncompetes; the clauses are generally presented as nonoptional on or after the first day of work. Noncompetes also reduce economic dynamism and impede entrepreneurship. In recent years, many states — from Washington to Colorado to Maine — have passed laws to restrict them.

Last week’s bill in Hartford follows a seismic recent development on noncompetes at the federal level: In early January, the Federal Trade Commission proposed banning virtually all noncompetes because of their harmful impact on labor market competition, workers and the economy. (The FTC is accepting public comment through March 20.) To top it off, last week U.S. Sens. Chris Murphy (D-Conn) and Todd Young (R-Ind.) introduced the Workforce Mobility Act, a bipartisan federal bill in Congress that would also prohibit virtually all noncompetes. And President Biden criticized noncompetes in his State of the Union address on Tuesday.

Connecticut’s not the only state looking to curb noncompetes right now. A bill to void all noncompetes was recently introduced in Minnesota.

In light of these federal developments, Connecticut lawmakers might question the need for a state law. But halting state action on noncompetes would be a big mistake. States should continue to act, perhaps even more aggressively and urgently given the FTC’s comprehensive 200-plus page record about noncompetes’ harm.

“The FTC has changed the contours of the debate,” observed Evan Starr, a University of Maryland economist who’s extensively studied the subject. Previously, “It was ‘for whom should we ban noncompetes?’ Now it is ‘do we need these at all?’”

Starr recently described ongoing research, not yet published, demonstrating that employers don’t actually value noncompetes. In Washington, companies generally didn’t raise worker pay even a smidge to raise worker salaries above a threshold that would allow noncompetes to be used.

There are also specific reasons why states should continue to take action, no matter what happens in the nation’s capital. For starters, while the bill in Congress is excellent and its bipartisan nature is refreshing, the new GOP House majority may be unlikely to approve of measures that could be perceived as anti-business. And no matter how reasonable, appropriate and well-supported by law and evidence the FTC rule is, it will almost certainly be challenged in court, by the Chamber of Commerce purporting to speak for business.

(The business community is actually divided on noncompetes: some oppose use of these provisions because they want to hire the best workers, or they’d prefer to compete for talent by offering better working conditions. Not to mention, entrepreneurs are literally job creators, and noncompetes make it harder for them to do their job-creating thing.)

Nonetheless, lawsuits will surely be filed, with Henny Penny predictions about the FTC proposal. Given the Supreme Court’s hostility to federal regulation and to workers, it’s not an altogether promising situation. Continued state legislation will ensure that abuse of noncompetes is curbed no matter what happens federally.

Even if the FTC rule were to take effect, state action would still be needed to make policy change real in people’s lives. Research shows that many employers use noncompetes even in states where they’re void. Workers, especially low and middlewage workers, don’t know their workplace rights as a general matter, and certainly don’t know about noncompete laws.

Research shows that workers assume that the terms in their employment contract are valid, and their ability to change jobs is chilled. These realities call for extensive public education and outreach about noncompete limits, as well as proactive, effective enforcement.

State laws are needed to give state labor departments the ability to play a leading role in this arena. These agencies routinely interact with thousands of workers, and could readily add a question about noncompetes to intake forms or asking about them in worker interviews. It would be inefficient and a lost opportunity if labor departments couldn’t get in the game.

State laws would ensure continued enforcement despite shifting priorities of changing federal administrations. Plus, there are generally inadequate government resources for enforcement of workplace laws, which is why it’s important for workers to be able to file lawsuits directly, and not just rely on the government. State laws on noncompetes have generally included a private right of action, which allows people to bring cases in court.

States also administer unemployment insurance programs, which provide much-needed support for people while they’re unemployed. The ideal, though, is to help people find good jobs and get back to work, and noncompetes create an obstacle for that objective.

Similarly, states administer workforce development and employment services programs that help retrain people and match them to job openings. People who could readily find work in their existing field may find themselves seeking state-run services because they are subject to a noncompete and must retool in order to get a job.

Finally, states that prohibit noncompetes will create a more competitive and attractive environment for workers and job creators alike. State-by-state comparisons show that workers receive higher wages when states don’t allow noncompetes. Why would a state not want its residents to make more money? And why would a state not want an entrepreneur with a brilliant idea to be able to bring it to fruition?

The new bill in Connecticut isn’t perfect. It doesn’t demonstrate an understanding that the FTC’s record has changed the terms of the debate. For example, rather than banning virtually all noncompetes, as the FTC and the federal Workforce Mobility Act both propose, the Connecticut provision would categorically prohibit them only for workers making less than around $90,000 per year. (Other jurisdictions have used much higher thresholds: $150,000 in Washington, D.C., and $116,000 in Washington state). Still, the Connecticut bill would unquestionably move the dial in the right direction.

The FTC proposed ban on noncompetes and the Workforce Mobility Act are both well-supported and urgently needed. But whatever happens with these federal proposals, states still have skin in the game. Connecticut lawmakers should take action during this session, and other states — if they haven’t already — should swiftly do the same.