The Federal Trade Commission has proposed a new rule that would prohibit non-compete clauses from being used in employment contracts.
Approximately one in every five employees has signed these clauses, which prevent them from joining a competing business or starting their own for months or even years after leaving a company.
Noncompetes are prohibited in a few states. Others have restricted their use, particularly for hourly workers earning low wages.
According to the researchers, there is another reason to scrap these agreements. They have the potential to disproportionately harm women and people of colour. Furthermore, eliminating them may raise wages for underrepresented groups.
“Several studies now suggest that noncompete agreements have a disproportionate impact on women and people of colour,” said Evan Starr, assistant professor of economics at the University of Maryland.
What exactly is a noncompete agreement?
Employers argue that noncompete agreements protect trade secrets and other confidential business information while also assisting them in retaining employees in a tight labour market. These clauses, they claim, also encourage companies to invest in training and career development.
The FTC claims that noncompete agreements artificially suppress wages, even for workers who do not have them, reduce labour market competition, and kill innovation.
“These restrictions can jeopardise core economic liberties, limiting Americans’ ability to freely switch jobs,” FTC chair Lina Khan said.
According to Orly Lobel, law professor and director of the University of San Diego’s Center for Employment & Labor Policy, it’s not just about giving workers more options. Noncompetes can also be prohibited, which can improve working conditions.
“The FTC talks about the $300 billion that can be gained by having true competition in the talent market,” said Lobel, author of “The Equality Machine: Harnessing Digital Technology for a Brighter, More Inclusive Future.”
What are the consequences of noncompetition for women and people of colour?
Bridget Mroczkowski works in an industry dominated by women as a customer service representative in Wisconsin, where noncompetes are legal. She was required to sign a noncompete agreement as a condition of employment, despite the fact that she claims she has no access to “any trade secrets or things happening at a higher level.”
While most noncompetes bind executives and skilled professionals, these clauses bind 32 million Americans, not just high earners. According to a 2019 survey conducted by the liberal Economic Policy Institute, nearly 30% of businesses with an average wage of less than $13 per hour used non-compete agreements.
Mroczkowski claims that her pay is below the market rate and has not kept pace with inflation. If she wasn’t restricted by a noncompete, she could double her income by switching to a competitor’s company. She claims that in order to increase her salary, she would have to change industries.
Why do employees sign noncompete agreements?
Non-compete agreements are frequently required as a condition of accepting a job. These agreements are negotiated by less than 10% of workers. Some 30% to 40% of employees are asked to sign agreements after they have already started working and have less bargaining power.
“When you have the ability to move jobs with a skill set behind you, you can always make more and it gives you more bargaining power in your current position,” Mroczkowski explained.
What evidence does noncompete research provide?
According to Najah Farley, senior staff attorney with the National Employment Law Project, workers bound by noncompetes must either give up job opportunities or sit out the workforce for an extended period of time.
“You are definitely putting workers of colour, particularly Black workers, who are already subject to severe wealth inequality in this country, in an untenable situation,” Farley said. “They already have less wealth and less ability to overcome such economic barriers.”
According to research, women and people of colour, who have historically faced disadvantages in the workplace, including large pay gaps, are less likely to negotiate or violate non-compete agreements than their white counterparts.
Women are less likely than men in states that enforce noncompete clauses to risk losing their jobs if they are bound by one of these clauses.