One in five workers is bound by a non-compete agreement. Here's why the Obama administration is asking states to reform non-compete policies to enhance wages and competition.
The White House is asking states to ban non-compete agreements that it said hold back wages and entrepreneurship. On Tuesday, the Obama Administration put out a call to action and set of best practices for states to reduce unnecessary non-compete agreements. The move is part of the president's April Executive Order directing states to increase competition for workers and consumers.
"We're taking tangible steps today both in the area of collusion and non-compete to create more competition in labor markets that we think will be good for workers and good for growth," said Jason Furman, chairman of the Council of Economic Advisers, during a White House press call on Tuesday.
One in five US workers is bound by a non-compete agreement, which prohibits them from working for another competing employer after they leave their current job. Traditionally, these agreements were meant to protect trade secrets. However, they now apply to 14% of workers making less than $40,000 per year, Furman said.
Evidence shows that these agreements reduce wages, entrepreneurship, and broader innovation, according to White House research, and that most workers should not be restricted by one.
To reduce the misuse of non-compete agreements, the White House has asked state policymakers to adopt the following best practices, as laid out in this document:
1. Ban non-compete clauses for categories of workers. States could prohibit non-competes for certain kinds of workers, such as those under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause.
2. Improve transparency and fairness of non-compete agreements. States could, for example, disallow non-competes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power); providing consideration over and above continued employment for workers who sign non-compete agreements; or encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.
3. Incentivize employers. One way to reduce non-compete agreements could be to write enforceable contracts and encourage the elimination of unenforceable provisions by, for example, promoting the use of the "red pencil doctrine," which renders contracts with unenforceable provisions void in their entirety.
Elected officials in Connecticut, Hawaii, Illinois, New York, and Utah have already signed on to support the call to action, the White House announced. The White House also released a report on current state policies on non-compete agreements.
Lori Goler, head of human resources at Facebook, joined the call to discuss how Facebook does not use non-competes in its employment offers in any jurisdiction in the US. "We don't believe [employees] should have to stay at Facebook if it isn't a good fit for them," Goler said. "We generally believe free movement allows for a healthy exchange of talent across the ecosystem."
Cisco also does not ask employees to sign noncompete agreements, said Mark Chandler, Cisco's senior vice president and general counsel. "We think it's unfair to lock people up under employment when there are good trade secret laws that protect that when people move," Chandler said. "When innovation thrives and employees can move and find new opportunities, we think our boat rises as well."
The Department of Justice and the Federal Trade Commission also released guidance for HR professionals on how to spot and report collusion among competing employers that may violate antitrust laws.
In 2015, Apple, Google, Intel, and Adobe Systems agreed to pay a $415 million settlement in an antitrust lawsuit that accused the companies of conspiring to keep wages low by not hiring each other's workers.
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