#65 What are non-compete agreements?

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Your faithful writer,
Dr. Daniel Smith

ART OF THE DAY

Last week, the Federal Trade Commission (FTC) announced that it would ban non-compete agreements (NCAs) for most Americans.

Given the fact that nearly 20% of American workers are covered by NCAs, this is a big deal.

The move by one of America’s most important regulators comes after years of debate and research, with economists and experts arguing that NCAs keep wages down and make it more difficult for workers in some industries to get new jobs.

Unsurprisingly, pro-corporate groups like the Chamber of Commerce have since filed lawsuits aimed at blocking the FTC’s move.

What are non-compete agreements? 

Non-compete agreements (NCAs) are contracts that many workers sign that bar them from working for a competitor to their employer for a pre-determined amount of time after leaving their job.

In many U.S. states, employers can sue former employees for allegedly violating these contracts when they get a new job.

The FTC estimates that ~30 million American workers are subject to non-compete agreements as part of their work.

What’s the argument in favor of non-compete agreements?

The idea behind non-compete agreements is that they can prevent companies from poaching highly-skilled workers from their competitors.

Without NCAs, these workers can hop between jobs and bring trade secrets or insights into the competitor’s strategy to their new firm, giving them an unfair advantage over the employee’s former employer.

However, research has shown that non-compete agreements hurt workers.

Studies have found that widespread use of NCAs:

• makes labor markets less competitive

• keep wages lower than they might otherwise be

• reduce labor mobility between jobs for workers

Experts have also found that state-level moves to ban non-compete agreements can raise wages.

After Oregon banned non-compete agreements in 2008, the wages for workers who were paid on an hourly basis increased by 2-3% on average.

How do non-compete clauses work in practice?

Here’s an example: Robert Brady, a psychiatric nurse practitioner in Florida, was sued by his former employer for starting his own practice after he left his former job.

The non-compete agreement read:

Because his former employer had healthcare offices across the state, they were able to sue him based on the idea that his new practice was within 20 miles of one of their offices — even though that office had closed months before.

Brady, who started his own firm to try to address the medical needs of his community, said that the experience of being sued by his former employer:

What’s the future of NCAs?

According to polls, Americans are happy with the idea of banning NCAs.

The ban is supposed to take effect in about 120 days, but the lawsuits from the Chamber of Commerce and other pro-corporate lobbying groups could delay things a bit.

If we listen to the FTC, we should expect that the NCA ban will have a very positive effect on the American economy:

Thank you for reading. Please reply to this email if you have any thoughts or feedback.

Yours,
Dan