News at Smith

Feds to Scrutinize Noncompete Clauses

May 11, 2016

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SMITH BRAIN TRUST — The White House has announced it will confront an issue that might be producing inefficiencies in the labor market and suppressing workers' wages: The overuse — and abuse — of noncompete clauses, which prevent people from moving from one company to another in the same field. "Often, these agreements can create unnecessary roadblocks for any worker trying to get a raise," Vice President Joe Biden wrote on his Facebook page, pointing to a new White House paper on the topic. The report, as well as a Treasury Department paper that precedes it, draws heavily on research by Evan Starr, an assistant professor of management and organization at the Robert H. Smith School of Business. "This is the first time the federal government has gotten involved in this issue," Starr says. "It's quite a big step on a number of levels."

Slow wage growth, following the 2008 recession, has been a weak point in the economy, and this appears to be a move by the administration to target one possible contributor. While noncompetes are intended to protect intellectual property and proprietary business practices, Starr has revealed, through surveys, that they are common in all sorts of occupations and industries. About 14 percent of workers making $40,000 or less work under such constraints, as do 15 percent of those lacking a four-year degree. That wasn't much different from the 18 percent of the workforce as a whole working under noncompetes. Overall, 37 percent of U.S. workers have signed a noncompete agreement at some point.

In theory, noncompetes ought to spur more investment in job training by companies, since they don't have to worry about workers walking away. That would also imply that workers get raises as their skills increase. But Starr's research, cited by the administration, found that states that enforce noncompetes in fact see lower wages over the course of workers' careers.

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The White House paper presents several potential problems with noncompetes, as they currently exist, as well as policies that some states have used to mitigate them. First, there's fairness to low-income workers. Oregon requires that workers be white-collar workers — well above the minimum wage — before a noncompete is enforceable.

Many workers say they are blindsided by noncompetes. They aren't asked to sign them until they've accepted a job, at which point their negotiating power is limited. Oregon and New Hampshire require that workers be told either at the time of an offer or before. Some people find themselves laid off, then unable to look for a job because of a noncompete. Courts in Montana and New York have decreed they won't enforce the contracts in such cases.

Many companies ask workers to sign noncompetes, even in states like California where such agreements aren't enforceable. The Treasury report calls for transparency, suggesting that companies be required to disclose the enforceability of noncompetes.

The paper also raises the issue of whether there are some specific areas of the economy in which noncompetes hurt the public good in particularly glaring ways — the home health-care industry, for example, in which demand for services, and the stakes for patients, are high, yet workers remain in short supply.

Starr says the jury is still out on whether noncompetes on balance help or hinder innovation. "Ex ante, it could go either way," he says. Innovation might suffer if companies fail to invest in their employees, fearing they'll walk. Alternatively, it might increase if workers can freely leave one work environment to cross-pollinate another. (In theory, this is how it works in Silicon Valley, although several top companies there have been caught making secret deals not to poach workers.) "We need more states to start changing their policies before we can know for sure," Starr says.

Hawaii recently banned noncompetes for tech workers, creating what could be an illuminating case study, as the transition occurs. "I'm fine with states having different preferences about how they want to treat their labor markets, and with states having different policies that match their goals," Starr says. But for the first time, in part because of the work of a Smith School scholar, the issue is on the agenda of the White House.

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About the University of Maryland's Robert H. Smith School of Business 

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty masters, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.