Noncompete agreements are widely used to stop ex-employees from walking out of the door with valuable know-how or poaching suppliers and customers when they move jobs. Sometimes a great deal of money and intellectual property is at stake.
When Paul English, an entrepreneur, sold his travel-search website, kayak.com, to Priceline for $1.8 billion in 2012, he signed a contract that barred him from working in the travel industry for 18 months. The restriction was fair, he said. “If a company pays nearly $2 billion, they have the right to tell you that you can’t create a competitor.”
But noncompetes are common for ordinary American employees, too. Nearly one in five are subject to them and nearly two-fifths have had to sign one at some point, as have about 15 percent of low-wage workers and a similar share of employees without university degrees. A report in 2016 by the Treasury noted that less than half the workers covered by noncompetes reported having access to trade secrets.
Jimmy John’s, a chain of sandwich shops, used to make its restaurant workers and delivery drivers sign them. The clause barred them for two years from working for any other sandwich shop within 2 miles of any of its 2,700 outlets. It stopped using them in 2016 at the behest of the New York attorney general’s office, which said that noncompete agreements “limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued.”
Such arguments are gaining force across America. Several state legislatures are considering restricting their use, at least for workers on modest wages. A few are thinking of copying California, where noncompete agreements count as illegitimate “restraints of trade” unless they protect trade secrets or are part of the deal when a business is sold.
Noncompetes might not be harmful for workers, on balance, if employers had to pay extra to compensate employees for signing away some of their rights. But an analysis by Evan Starr of the University of Maryland suggests this is not what happens. Hourly wages are 4 percent lower in states that enforce noncompetes than those that do not.
Research at Chicago’s Booth School of Business found that more companies invest in equipment in states where noncompetes are legally enforceable. On the other hand, research Jessica Jeffers said, fewer companies in desirable fields such as technology, professional services or education formed in those same states.