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Five Things To Know About Noncompete Clauses

Oct 31, 2019
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It wasn’t the most talked-about hearing on Capitol Hill this week, but for workers across the economy, the topic was vital.

Evan Starr, assistant professor of management and organization at the University of Maryland’s Robert H. Smith School of Business, testified Tuesday before the House Committee on the Judiciary, Subcommittee on Antitrust, Commercial, and Administrative Law, about competition in labor markets.

Starr is one of the country’s leading experts on labor market competition, specifically the use of noncompete clauses. Under those clauses, employees are restricted from changing jobs within their industry or breaking out to start a company on their own.

The use of such clauses has become more common in recent years, and has been upheld in several states, based on a person’s freedom to enter into contracts.

But Starr’s research has found that prevalent use of enforceable noncompete agreements is associated with negative consequences for the entire labor market, not just for the individuals who sign them.

Testifying on Tuesday, Starr cited significant concerns related to labor market competition, including the extent of labor market concentration and some anticompetitive practices.

He says the practice “by definition restrains trade in the labor market.”

In his opening remarks in the House, Starr read aloud the text of a noncompete or covenant not to compete clause, one signed by a temporarily employed packer at Amazon.com. It read, “During employment and for 18 months after the Separation Date, Employee will not, directly or indirectly, whether on Employee’s own behalf or on behalf of any other entity (for example, as an employee, agent, partner, or consultant), engage in or support the development, manufacture, marketing, or sale of any product or service that competes or is intended to compete with any product or service sold, offered, or otherwise provided by Amazon (or intended to be sold, offered, or otherwise provided by Amazon in the future) that Employee worked on or supported, or about which Employee obtained or received Confidential Information.”

Starr says noncompetes often prevent workers from working where they want to and from earning what they would in a competitive market. “In my research,” he said, “I have sought to understand how common noncompetes are, how they influence workers and firms, and what sort of effects banning them has on economic activity.”

Here are Starr’s five key takeaways about the labor market impact of noncompete clauses:

Noncompetes are everywhere. They are found most frequently in high-wage jobs, but they are also found regularly in low-wage jobs. Noncompetes are rarely negotiated over, and are regularly presented to workers when they have limited outside options.

They reduce wages and entrepreneurship. Despite reasonable arguments that noncompetes might benefit workers and firms, most research suggests that the use and enforceability of noncompetes reduces wages, entrepreneurship, and job-to-job mobility, making it harder for firms to hire, and creating negative spillovers for others in the market.

They have a wide reach. Noncompetes are still common in states that do not enforce them, and even these unenforceable noncompetes appear to limit employee mobility.

There are better devices. Noncompetes are blunt tools to protect legitimate business interests because they prohibit individuals from joining or starting other firms in the industry. More precise tools are available to do similar jobs for the firm without constraining worker options so severely. The efficacy of noncompetes should be judged based on the relative tradeoffs between these alternatives.

More information is needed. Despite recent advances, data on the actual use of noncompetes and similar provisions remains scarce. Additional data would be helpful in understanding, for example, actual labor market concentration. With a mandate from Congress, the FTC would be well suited to gather and analyze this data.

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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 master's, 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.