World Class Faculty & Research / February 17, 2016

Signing Away Your Right to Get a New Job

SMITH BRAIN TRUST — When you accepted your current job, did you sign a noncompete agreement? "Noncompetes" can lurk among all the routine forms you sign during the hiring process, but they can come back to bite you. Long common in fields such as engineering, and for executives, they are now being pushed on low-income workers, limiting their freedom in the labor market.

In one notorious example, the Jimmy John's sandwich chain requires its workers to sign away the right to work at any sandwich shop within three miles of any Jimmy John's franchise, for a full two years after leaving the company. (Jimmy John's does not leave the definition of "sandwich" to chance, specifying that the rule applies to any place that purveys "submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches.")

Amazon, meanwhile, makes its workers pledge to not take a job, for 18 months after their departure, with any company that develops, manufactures, markets or sells any product or service sold on Amazon. That covers quite a few companies. Until the tech website The Verge publicized the practice last year, even Amazon's hourly warehouse workers, down to temporary holiday workers, had to sign such agreements.

New York's Attorney General is investigating noncompete agreements, exploring whether they illegally restrict the ability of workers to change jobs.

Every state but California and North Dakota enforces employee-related noncompete clauses to one degree or another, although some will curtail or strike down those that they deem overly broad. But even overly broad, ultimately unenforceable restrictions can shape behavior, says Evan Starr, an assistant professor at the Robert H. Smith School of Business, at the University of Maryland. In a recent set of projects undertaken with Norman Bishara and J.J. Prescott, of the University of Michigan, he surveyed some 11,500 U.S. workers about their experience with noncompetes.

"You can imagine getting a threatening letter from Amazon's legal department, and you are making $10 an hour," Starr says. "These people are not going to be keen to go to court with Amazon." So they may give up employment opportunities even though they have the law on their side.

U.S. Sens. Al Franken (D-Minn.) and Chris Murphy (D-Conn.), have introduced a bill — Starr consulted with Senate staffers on it — that would ban noncompete agreements for low-income workers. Known as the Mobility and Opportunity for Vulnerable Employees Act, or the MOVE Act, the bill would also require companies to present noncompete agreements to higher-paid employees early in the hiring process. It is not uncommon for companies to ask employees to sign the documents after they've accepted a job and relocated their families — when employees have no leverage, in other words.  "Firms use them somewhat unscrupulously," Starr says. "They are used just as frequently in states that do not enforce them as they are in states that enforce them."

Starr's work suggests that people seldom negotiate over noncompetes. In the survey, only about 10 percent of workers said they did so. Another 20 percent said they declined to negotiate because they feared creating tension with their employer, 40 percent simply assumed they couldn't negotiate, and 50 percent declined because they thought the agreements were fair. (Survey respondents could check more than one option.)

Both supporters and opponents of noncompete agreements have good arguments, Starr says. Firms may be reluctant to invest in innovative technology or processes if their employees can walk across the street to a competitor. Economic theory suggests, moreover, that if people are signing noncompetes willingly, they think the current benefits (namely, the job) outweigh the future restrictions. And, after all, a contract is a contract. The law doesn't offer an "I didn't read the document closely" exemption for signed agreements, although people often say that noncompetes took them by surprise.

On the other hand, a flexible labor force is one of the key drivers of the American economy, and noncompetes introduce sclerosis into the system in a hard-to-measure way. Starr says his goal is to provide empirical information about how noncompetes are used, and how they affect employees, firms, and regions, so politicians can make informed decisions. "My opinion is that the data is not yet in, but that there is scope for the state laws to be reformed to protect workers who don't possess any trade secrets, and who don't pose any kind of threat to the firm, but who are being harmed by these contracts," he says.

At this point, however, he says his main goal is "to infuse this contentious debate with sorely needed data."

On a practical level, Starr says you should certainly negotiate with your employer over a noncompete provision you find worrisome, just as you would negotiate salary. And you should check the laws of your state, since those laws might shape negotiations — as well as your options whether or not you negotiate.



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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 flex MBA, executive MBA, online MBA, business 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.

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