The Use, Abuse, and Enforceability
of Non-Compete and No-Poach Agreements:
A Brief Review of the Theory, Evidence, and Recent Reform Efforts
FEBRUARY ISSUE BRIEF
EVAN STARR, ASSISTANT PROFESSOR, UNIVERSITY OF MARYLAND ROBERT H. SMITH SCHOOL OF BUSINESS
2
Over the last 40 years the startup rate has halved, job mobility has declined 22%,
1
and real wages for the bottom 90% of earners have grown by only 0.4% per year,
with the lowest 10% of earners seeing real wages fall by 5% over this period.
2
Is this
the economy Americans want? What, if anything, can policymakers do to reverse
these trends?
While there are certainly many factors underlying these patterns, two distinct
employment practices have come under increased scrutiny because they curtail
individual freedom to pursue better job opportunities: covenants not to compete
(non-competes) and no-poach agreements.
Non-competes, which in 2014 covered approximately one out of every five labor
force participants in the United States, prohibit individuals from joining or starting
competing businesses, typically within time and geographic boundaries.
3
The use
of non-competes is so pervasive that even volunteers in non-profit organizations, in
states that do not even enforce them,
4
are asked to sign away their post-employment
freedom. No-poach agreements, which are compacts between employers not to hire
workers from each other, have also spread. Estimates suggest they covered nearly
60% of major franchises in the United States in 2016.
5
Given that these constraints prevent individuals from starting companies or taking
better jobs in their chosen field, it is not difficult to see how the expansive use
of these provisions could contribute to the observed declines in U.S. economic
dynamism. To reinforce the suspicion: California, home to some of the most
innovative and highest velocity labor markets in the world, does not generally
enforce non-compete agreements.
6
Yet most other state courts do enforce them,
in large part thanks to a long unresolved debate that juxtaposes the freedom to
contract against bargaining power imbalances and negative externalities. Recent
empirical evidence has brought some clarity to this debate, finding in general
that state policies that curtail the enforceability of non-competes are associated
with greater mobility and entrepreneurship, as well as higher wages. In this brief,
I review these arguments and the burgeoning empirical literature, closing with an
examination of several recent reform efforts.
Non-competes, which in 2014 covered approximately one out of
every five labor force participants in the United States, prohibit
individuals from joining or starting competing businesses.
Why now?
Today, non-competes and no-poach agreements are featured on the agendas
of federal and state legislatures, state Attorneys General (AGs), and antitrust
agencies. Since 2016, two federal agencies have written reports on non-competes,
and state and federal legislatures have proposed more than 20 new laws to reform
non-compete and no-poach agreements.
7
Meanwhile, state AGs have investigated
several high-profile cases of abuse,
8
and the antitrust agencies have also pressed for
reform, beginning with the Department of Justice’s (DOJ’s) 2016 Human Resource
Guidelines, which noted that it is illegal for competing firms to agree to limit or fix
the terms of employment.
9
DOJ has continued to prosecute no-poach violations
3
under the Trump Administration,
10
and the Federal Trade Commission (FTC)
recently signaled its willingness to consider rule-making on non-competes, too.
11
One FTC commissioner, Rohit Chopra, placed labor market competition at the
heart of the agency’s mandate in a recent hearing on Competition and Consumer
Protection in the 21st Century:
12
Open, competitive markets are a foundation of economic liberty. But markets
that suffer from a lack of competition can result in a host of harms. In
uncompetitive markets, firms with market power can raise prices for consumers,
depress wages for workers, and choke off new entrants and other upstarts.
Why are policymakers zeroing in on non-competes and no-poach agreements now?
First, a number of publicized abuses have raised awareness and caused significant
public outcry.
13
In the case of no-poach agreements, media attention prompted
a public backlash so severe that at least eight well-known franchises voluntarily
eliminated them from their organizational contracts.
14
Second, in the aftermath of the Great Recession, policymakers and economists have
become more concerned with declining economic dynamism, wage stagnation,
and the extent of concentration in the labor market.
15
For example, new research
documents that most local labor markets have so few employers hiring in each
job category that they would be considered highly concentrated by the standards
of the DOJ. Such concentration gives firms more “monopsony power” to exert
downward pressure on wages.
16
These trends precipitated the present interest in
non-competes and no-poach agreements for several reasons: First, the theoretical
avenues through which their overuse could contribute to declining dynamism are
clear.
17
Second, there is growing concern that non-competes are too blunt of an
instrument to address legitimate business interests when more scoped alternatives
are available. This point is exacerbated by the fact that non-competes prohibit a
worker from deploying his full range of accumulated knowledge and skills within
the focal industry, even if the present firm only added marginally to those skills
and knowledge. Lastly, since state non-compete law is so varied and momentum for
change is building, there seems to be a real window of opportunity for reform.
Primer on Non-Compete and No-Poach Agreements
What are the differences between non-compete and no-poach agreements?
Non-competes are employment provisions that prohibit individuals from joining
or starting a competitor after they leave their employer, within geographic and
time boundaries. As an example, consider the following non-compete, signed by a
temporarily employed Amazon packer making $13/hr in 2015:
18
During employment and for 18 months after the Separation Date, Employee will
not, directly or indirectly, … 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 … that Employee worked on or supported, or about which Employee
obtained or received Confidential Information.
4
While Amazon’s reach into so many corners of the American market makes these
broad restrictions particularly onerous, the agreement itself is representative of a
typical non-compete many workers sign as a condition of employment today.
No-poach agreements, on the other hand, are generally organization-level
agreements not to recruit workers from each other. Here is an example of a no-poach
agreement between franchisees at McDonald’s:
19
During the term of this Franchise, Franchisee shall not employ or seek to employ
any person who is at the time employed by McDonald's, any of its subsidiaries, or
by any person who is at the time operating a McDonald's restaurant or otherwise
induce, directly or indirectly, such person to leave such employment. This
paragraph 14 shall not be violated if such person has left the employ of any of
the foregoing parties for a period in excess of six (6) months.
How common are non-competes and no-poach agreements?
It is difficult to know exactly how common no-poach agreements are because they
are often forged in secret and, due to their collusive nature, they are generally illegal.
An exception is the franchise sector, which currently occupies a legal gray area that
the courts are sorting out.
20
Data from that sector shows that approximately 58%
of major franchises in the United States used no-poach agreements among their
franchisees in 2016, up from 36% in 1996.
21
Moreover, several recent Department of
Justice investigations have uncovered the illegal use of no-poach agreements among
Silicon Valley tech giants as well as among railroad suppliers.
22
Figure 1. Probability of Signing a Non-Compete Agreement (Based on Industry)
25%
15%
30%
35%
20%
10%
5%
0%
Agriculture
Accommodation, Food
Arts, Entertainment
Construction
Real Estate
Transportation, Warehousing
Retail
Other Services
Mgmt. of Companies
Healthcare
Education
Mining
Utilities
Manufacturing
Admin Support, Waste Mgmt.
Finance and Insurance
Wholesale
Prof. Scientific, Technical
Information
9%
10%
10%
11%
12% 12%
14%
16%
17%
18%
18%
19%
20%
22%
23%
25%
31%
31%
32%
Non-competes have become common across different sectors and skill levels. Among
executives, their use increased from 75% in 1996 to 86% in 2009.
23
At the other end of
the employment spectrum, it was first reported in 2014 that firms were also asking
minimum-wage sandwich makers, camp counselors, and unpaid interns to sign non-
competes.
24
A study of 11,500 workers in 2014 found these patterns hold across the
Source: Starr, Prescott, and Bishara, “Non-Competes in the U.S. Labor Force”
5
U.S. workforce: Nearly 50% of those earning more than $150k were bound by a non-
compete, while 14% of workers earning less than $40,000 a year were bound. This
study also found that non-competes tend to cluster in high-skill jobs and industries,
although they are prevalent across all occupations, industries, and income levels.
25
Other occupation-specific studies have corroborated these results, showing that 30%
of hairstylists are bound by non-competes, 43% of engineers, and 45% of physicians.
26
Firms are increasingly pursuing action against workers over non-competes as well:
Between 2000 and 2018, the number of reported non-compete court cases nearly
doubled.
27
Figure 2. Probability of Signing a Non-Compete Agreement (Based on Occupation)
25%
15%
30%
35%
40%
20%
10%
5%
0%
Farm, Fish, Forestry
Legal
Grounds Maintenance
Food Prep, Serving
Construction
Transportation, Mat. Moving
Office
Community, Social Services
Sales
Production
Physician, Technical
Education, Training
Management
Architecture, Engineering
Installation, Repair
Life, Physical, Social Sciences
Protective Services
Arts, Entertainment
Personal Care
Business, Finance
Healthcare Support
Computer, Mathematical
35%
30%
26%
25%
23%
22%
21%
19%19%
19%
18%
16%16%
15%
14%
12%12%
11%
11%
10%
6%
36%
Figure 3. Probability of Signing a Non-Compete Agreement (Based on Income)
25%
15%
30%
35%
45%
40%
50%
20%
10%
5%
0%
46%
32%
33%
27%
25%
21%
15%
12%
$0-$20 $20-$40
$40-$60
$60-$80 $80-$100
$100-$120
$140-$150 $150+
Annual Earnings (thousands)
Source: Starr, Prescott, and Bishara, “Non-Competes in the U.S. Labor Force”
Source: Starr, Prescott, and Bishara, “Non-Competes in the U.S. Labor Force”
6
The question of whether workers willingly consent to non-competes or
whether they have no practical ability to turn them down due to limited
bargaining power lies at the heart of the current policy debate.
Are non-competes enforceable in court?
Non-competes are agreed to by workers and thus there is a presumption of voluntary
assent based on the notion that workers would not agree to such restrictions unless
they were getting something of equal or greater value in return. The question
of whether workers willingly consent to non-competes or whether they have no
practical ability to turn them down due to limited bargaining power lies at the heart
of the current policy debate. It joins a bigger and centuries-long question about
whether and under what circumstances restraints on trade, such as a non-compete,
may be permissible, given the harm such measures can inflict on the economy.
28
This debate has led to a patchwork of non-compete laws across states, where courts
generally decide whether a given non-compete satisfies a reasonableness test. On
one end are a small number of states that generally do not enforce non-compete
agreements, like California, which adopted its ban in 1872.
29
On the other are states
like Florida, whose current statute (passed in 1996) instructs courts examining a non-
compete case to “not consider any individualized economic or other hardship that
might be caused to the person against whom enforcement is sought.”
30
Most states
fall closer to Florida than they do to California, as documented in the map below,
which presents an up-to-date look at state policies. In one recent case, for example, a
Massachusetts court enforced a non-compete against a janitorial supervisor making
$18/hr, although the company dropped the lawsuit after significant public outcry.
31
Figure 4. Non-Compete Enforcement by State
Permitted
Permitted with Exceptions
Washington, DC
Banned
Source: Beck Reed Riden 50 State Non-compete Chart
7
Theory and Evidence
A note on the difference between non-compete enforceability and non-compete use
The literature on non-competes covers two related but different dimensions: (1) the
effects of signing a non-compete, and (2) the effects of state policies that enforce
non-competes. This distinction is important for several reasons. Most importantly,
the studies of non-compete enforceability are the most relevant for lawmakers,
because lawmakers choose the law but do not dictate the terms of private
employment contracts (though several new proposals seek to impose penalties
on firms caught using unenforceable non-competes). Studies of enforceability
also happen to be far more numerous. Nevertheless, there is evidence that the
mere inclusion of a non-compete provision, regardless of its enforceability,
produces chilling labor market effects. For example, in one study nearly 40% of
workers reported turning down a job offer from a competitor because of a non-
compete, even though they worked in states where such provisions were entirely
unenforceable (subsequent work shows the workers were largely unaware of the
law).
32
In many ways, as more data becomes available, these two streams within the
non-compete literature are converging, although there are still important gaps and
puzzles that require reconciliation.
The Contracting Process
Those against the use or enforcement of non-competes emphasize that labor
markets are fraught with frictions, incomplete information, and unscrupulous
employers interested in reducing turnover or holding wages down. They suggest
that, in practice, non-competes are often implemented in ways that limit employee
bargaining power, such as offering the non-compete on the first day of work, or are
asked of vulnerable workers who have no other choice but to sign. In this view, firms
wield substantial bargaining power and can simply tack on a non-compete to the
employment contract without necessarily compensating the worker fairly for their
postemployment concessions.
In contrast, the pro-non-compete perspective privileges investment protection
and private contracting. It holds that enforceable non-competes are necessary for
the investment in valuable information that workers could otherwise appropriate
for themselves by moving to or starting a competitor. With an enforceable non-
compete, firms may invest more in their workers and trust them with access to more
valuable information, which ultimately may make them more productive in their
job. Moreover, proponents argue that labor markets are generally competitive and
that workers have the power to negotiate these contracts.
Evidence on the hiring and contracting process suggests that the signing of a non-
compete is rarely a bargained outcome, however. One nationally representative
study finds that less than 10% of workers negotiate over the terms of the non-
compete or for other benefits in exchange for signing.
33
When asked to sign a non-
Evidence on the hiring and contracting process suggests that
the signing of a non-compete is rarely a bargained outcome.
8
compete, 93% of workers simply read and sign. Moreover, more than 85% of workers
report that firms did not offer any additional benefits in exchange for signing the
non-compete. Transparency concerns also loom large: two studies find that 30-
40% of workers who are asked to sign non-competes are first asked after they have
already accepted the job, often on the first day when the worker has already turned
down other job offers and may be in a weakened bargaining position.
34
The distinctions in these arguments can help us consider how non-competes might
differentially impact three separate groups.
1. Executives: Those who have extensive and intimate firm knowledge, access to
sophisticated legal counsel, and who can effectively negotiate in and out of
these sorts of provisions. This group is perhaps least susceptible to harm due to
non-competes.
2. Workers engaged in innovative activities: Individuals involved in knowledge-
creation often possess substantial amounts of tacit knowledge acquired through
their work, education, and experience. These workers are especially important
for their role in spurring innovation and entrepreneurship, which in turn lead to
positive, economy-wide spillovers and increases in aggregate productivity.
35
3. Low-wage workers: These workers likely have little bargaining power, and they
may need the job to put food on the table tomorrow. They also have little access
to legal counsel and are thus likely sign a non-compete when asked.
Worker Mobility, Hiring, and Entrepreneurship
Since non-competes function by limiting the available set of job options for workers,
they can influence both where individuals go when they leave, and if they leave in
the first place. The evidence shows that non-compete-bound workers stay in their
jobs longer. In one study, being bound by a non-compete is associated with an 11%
increase in job tenure.
36
Research on different state policies finds corroborating
evidence across several samples and empirical methods. For example, the 2015
Hawaii ban on non-competes for tech workers increased employee mobility in the
sector by 11%.
37
Similar results are found for executives, patent holders, and the
universe of individuals with LinkedIn records.
38
A preliminary analysis of Oregon’s
2008 ban on non-competes for hourly workers finds similar results.
39
The flip side of non-competes impeding employee mobility is preventing firms from
hiring the candidates they would like to hire. Four studies find evidence consistent
with the notion that firms have trouble hiring workers in higher enforceability
regimes.
40
And it appears that young firms are hit particularly hard: One study finds
that in higher enforceability states, new firms start with fewer employees, are more
likely to die in their first 3 years, and that even the firms that survive stay smaller in
their first 5 years.
41
In addition to extending employment durations and making it challenging to hire,
non-competes also have the potential to influence where and in which industry
individuals work. Two studies suggest that individuals bound by non-competes are
redirected to other industries, including 11% of those who have ever signed one.
42
Other studies find that tech workers and patent holders are more likely to leave
states that enforce non-competes.
43
9
Since covered workers are also restricted from starting a new
firm if they develop a novel idea or devise a better way of doing
business, non-competes can stymie entrepreneurship.
Figure 5. Job Separation in Hawaii Before and After Non-Competes Ban
.14
0.07
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
0.09
.11
0.08
.1
.12
.13
Separation Rate
Ban Implemented
Hawaii Counterfactual (no ban) Hawaii
Source: Balasubramanian, et al., 2018. Counterfactual represents a synthetic estimate created by matching Hawaii’s pre-ban trends with weighted
combinations of other states’ trends. The sample is limited to only the tech industry.
Since covered workers are also restricted from starting a new firm if they develop
a novel idea or devise a better way of doing business, non-competes can stymie
entrepreneurship. In total, seven recent studies examined the relationship
between non-compete enforceability and entrepreneurship, finding generally the
enforceability of non-competes dampens new firm creation.
44
One study found that
greater enforceability of non-competes reduced new firm entry by 18%.
45
The knock-on effects of these mobility and entrepreneurship patterns on the
productivity, innovativeness, and competitive intensity of the economy seem clear.
If workers are prevented from applying their skills in the fields in which they are
most qualified, or in the states where they want to work, or in the new firms they
want to found, then it might be expected that productivity and wages fall, and
aggregate employment suffers, since new firms contribute disproportionately to job
creation.
46
Nevertheless, there are some countervailing arguments for how non-
competes may spur investment, productivity advances, and wage increases at the
individual or firm level. I now turn to those arguments and the evidence.
Investment and Innovation
Firms may invest more in R&D and other innovation-related activities if they
believe a competitor is less likely to capture some of their knowledge investment
thanks to non-competes. For this reason, non-competes and their enforceability
can spur firm-level investment and innovation. However, in addition to the fact that
non-competes can push individuals into jobs for which they are less well-suited, the
10
churn of skilled workers among firms is also a central ingredient to the process of
innovation.
47
By reducing employee mobility, the proliferation and enforcement of
non-compete agreements may threaten innovation economy-wide as the potential
for ideas to recombine and cross-pollinate across firm boundaries also declines.
The empirical literature generally bears out this tension, though there is some
disagreement. The enforceability of non-competes is associated with more
firm-sponsored training of workers, increases in net capital investment rates,
the exploration of new fields, and the creation of riskier patents.
48
However the
mobility-inhibiting effects of non-compete enforceability also dampens knowledge
flows and makes venture capital less effective in spurring the creation of new
patents and employment.
49
Wages
The theoretical reasons why workers’ wages may suffer from non-competes and
their enforceability are clear: Job-to-job mobility is critical for earnings growth,
50
and if non-competes shield workers from accepting outside offers then they will not
experience the benefits of within-industry competition for their skills. Moreover, if
workers are pushed to industries in which they are less productive, then their wages
may also fall.
51
On the other hand, there are countervailing theoretical reasons for
why non-competes or their enforceability could be neutral or even beneficial for
workers. For example, if labor markets are perfectly competitive, then workers
should receive sufficient compensation such that agreeing not to compete in the
future serves in their best interest today. In addition, if the firm invests more
because of a non-compete and the worker is more productive as a result, then the
worker’s wages may rise. Which forces appear to dominate?
Several recent studies have examined the relationship between non-compete
enforceability and wages, and the findings generally suggest that workers in states
that enforce non-competes earn less than equivalent workers in states that do
not enforce non-competes.
52
One recent study finds that the Hawaii ban on non-
competes for technology workers increased new-hire wages by 4%. The same study
also documents that technology workers who start jobs in an average enforceability
state have 5% lower wages even eight years later relative to equivalent workers in
non-enforcing states.
53
Another two studies looking at broader segments of the labor
market document that the negative wage effects of non-compete enforceability are
generally borne by those with less education.
54
Several recent studies have examined the relationship between non-
compete enforceability and wages, and the findings generally suggest
that workers in states that enforce non-competes earn less than
equivalent workers in states that do not enforce non-competes.
By reducing employee mobility, the proliferation and enforcement
of non-compete agreements may threaten innovation
economy-wide as the potential for ideas to recombine and
cross-pollinate across firm boundaries also declines.
11
The studies cited above highlight how living in a state that more vigorously enforces
non-competes hurts wages, but they do not address the effects of actually signing
a non-compete. Identifying the latter effect is more challenging because non-
competes are more prevalent the higher one goes up the pay scale. Nevertheless,
several studies of high-skill occupations look specifically at the signing a non-
compete and find that CEOs and physicians who do sign non-competes earn more
than those who do not sign.
55
However, a separate study identifies an important transparency issue for
determining the ultimate wage effect of a non-compete. When firms delay notifying
workers about the non-compete until after the worker accepts the job, those workers
do not receive any wage premiums. They are also less satisfied and stay longer in
their jobs.
56
Looked at in its entirety, the existing body of research produces the somewhat
paradoxical result that non-competes can deliver wage premiums to individual
workers (in some cases) while enforceability itself generally depresses wages in
the market. How can both be true? The research does not yet provide a definitive
answer, but negative externalities are a prime suspect. A recent study analyzes the
mobility and wage effects of the incidence and enforceability of non-competes
across state-industry combinations for workers who are and are not bound by the
agreements.
57
The results suggest that relative to a state where non-competes are
not enforceable, a 10% rise in the industry incidence of non-competes is associated
with 4% lower wages among the unconstrained, 13% longer tenures, and a 16%-
24% decrease in the relative rate of job offers. Moreover, these negative effects are
Figure 6. New Hire Wages In Hawaii Before and After Non-Competes Ban
8.85
8.5
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
8.6
8.7
8.55
8.65
8.75
8.8
Average Quarterly Earnings for New Hires (Log Scale)
Ban Implemented
Hawaii Counterfactual (no ban) Hawaii
Source: Balasubramanian, et al., 2018. Counterfactual represents a synthetic estimate created by matching Hawaii’s pre-ban trends with weighted
combinations of other states’ trends. The sample is limited to only the tech industry.
There are many other tools that firms can use to protect their legitimate
business interests that do not explicitly restrict worker freedom.
12
statistically indistinguishable for those constrained by non-competes. Thus, the
evidence suggests that the mass use of enforceable non-competes dampens the
dynamism of the labor market as a whole.
Incumbent Firms
If the mass-use of enforceable non-competes reduces mobility, new firm entry,
and wages within the market, then incumbent firms stand to gain from the lower
turnover costs, lower wages, reduced competition and more secure investments in
knowledge and training. Indeed, one study finds that non-compete enforceability
increases firm value, while another documents that firms in states that enforce non-
competes are more likely to be acquisition targets.
58
Another study finds that larger
firms added more establishments when non-compete enforceability increased, at
the cost of new entrants.
59
Of course, non-competes and their enforceability are not
always good for incumbent firms, as they can impose significant hiring costs, as
demonstrated by the recent spat between HP and Cisco, in which the former tried to
block the latter from hiring its alumni.
60
*
The totality of these relationships raises an important question for policymakers:
Even if in theory a policymaker would prefer to treat private parties’ right to enter
into restrictive covenants as sacrosanct, does the evidence of abuse, negative
outcomes for workers and young firms, and negative externalities on the market as
a whole justify intervention? For an increasing number of public leaders from across
the political spectrum, the answer appears to be yes.
Alternatives Tools
One reason non-competes and no-poach agreements have captured the attention
of reformers is that they are incredibly blunt objects: they prohibit the worker
and thus all of the worker’s accumulated knowledge and skills from being
deployed elsewhere in the industry, even if the present firm’s contributions to that
accumulated set of knowledge and skills is tiny or nonexistent. Equally important,
there are many other tools that firms can use to protect their legitimate business
interests that do not explicitly restrict workers’ freedom to work in their chosen
industry and with their chosen employer. These alternative provisions include
non-disclosure agreements, non-solicitation of client agreements, IP assignment
agreements, and training repayment agreements, to name a few. These provisions
impose restrictions on workers directly targeted to the protectable interests of
the firm – trade secrets, client lists, specialized techniques – while not explicitly
limiting where an individual is free to work. Furthermore, preliminary work finds
that firms already tend to use these contracts in tandem rather than as substitutes.
61
In addition to other provisions, there are also other laws, such as trade secret laws
and patent laws, that firms may use instead of relying on non-compete laws.
Non-competes may have modest strengths relative to some of these alternatives
– for example, a violation is readily observable and thus court proceedings may
evolve more quickly and cheaply – but the research is increasingly clear that they
come with significant costs to workers as a class and to the overall dynamism of
the economy. Simply having a contract that says one cannot work in one’s chosen
13
industry, even if the contract is unenforceable, chills worker mobility.
62
The moral
or philosophical arguments against restricting employee choice have already
turned many lawmakers against non-competes. In light of the growing body of
evidence, many more now question whether the added value of a non-compete to
an employment contract suffices to compensate against the negative side effects.
Reform
As economists continue building the empirical evidence, policymakers show
increasing interest in reform. Many seem to be guided by the simple conviction
that if workers must compete against each other for jobs, then firms must compete
against each other for workers, end of story. Others view the anecdotal evidence
as sufficient proof that employers are abusing their power. Policymakers are also
attuned to research documenting the extent to which non-compete enforceability
curtails wages, employee mobility, and entrepreneurship. Although there is
substantially less evidence on no-poach agreements, it is not much of a stretch
to assume that such provisions are generally harmful given that workers have no
opportunity to agree to them.
In recent years, more than 20 federal and state policy proposals have sought to
combat the deleterious effects of non-competes and no-poach agreements, with
a handful of states passing new laws (the federal proposals have not yet been
passed or voted on). The approaches generally fall into two big buckets: Reforms
targeted at putting conditions on the use of such agreements, on the one hand, and
efforts to ban the tools outright and completely, on the other. Policy options under
consideration include:
• Ensuring transparency: These policies seek to ensure that the contracting
process is as transparent and fair as possible. This includes notifying the
worker about the firm’s desire to use a non-compete sufficiently early for the
worker to consider the restrictions before accepting a job. If the firm would like
to ask workers who have already joined the firm to agree to a non-compete, it
must come with a bona-fide advancement within the firm. Examples include
Massachusetts’ new non-compete law.
63
• Consideration and Garden Leave: These policies seek to ensure that workers are
partially compensated for what they give up. The notion of consideration is that
workers are paid something extra—a bonus or a higher wage, for example—in
exchange for signing a non-compete. “Garden leave” provisions require the
firm to pay the worker some portion of her salary while the worker abides by
the non-compete. Such provisions ensure that firms incur a cost to enforce a
non-compete, discouraging over-use and empty enforcement threats. Examples
include Oregon’s 2008 statute.
64
• Refusing to re-write overly broad provisions: Many states will re-write overly
broad non-competes and then enforce them. That is, a court could take a 10 year
non-compete, reduce it to 2 years, and then enforce it. This practice encourages
firms to write broad non-competes because in the worst case the court will still
enforce a pared down version. However, the conditions in the non-compete may
still chill workers from taking jobs or starting companies because they view the
overly broad restrictions as enforceable.
14
• Ban on non-competes for low-wage workers: These policies are generally justified
by the argument that low-wage or hourly workers have little bargaining power,
are the least likely to possess information that could damage the firm, and are
most susceptible to threats over the enforcement of non-competes because
they may not be able to afford legal assistance. Examples include the MOVE
Act, the Freedom to Compete Act, and recent bills in Illinois, Oregon, and
Massachusetts.
65
• Ban on non-competes for specific high-skill occupations: In the case of lawyers
(where non-competes are unenforceable in all states) and physicians (where
they are banned in several states), these bans rely on public policy concerns,
such as ensuring that clients and patients have access to legal advice and
healthcare. In the case of tech workers (for whom non-competes were banned
in Hawaii in 2015), the justifications rely on the notion that mobility and
entrepreneurship are good for innovation, as in Silicon Valley.
66
• A complete ban on non-competes: In addition to the justifications for the low-
wage and high-skill bans, this policy more strongly leverages the idea that non-
competes are unnecessarily blunt instruments whose negative mobility and
wage ramifications can spill over to the whole market, and that firms have more
precise ways to protect their legitimate interests without constraining workers’
employment options. On the investment and innovation front, California’s
policy of general non-enforcement, which was adopted in 1872, and the success
of Silicon Valley as the most innovative ecosystem in the country, if not the
world, is often touted as a stark counterexample to the logic that firms need
enforceable non-competes to protect their investments in IP.
67
Recent examples
include a push for the FTC to declare non-competes an unfair method of
competition and classify them as per se illegal under the FTC Act.
68
• A complete ban on no-poach agreements: While no-poach agreements are already
per se illegal, recent efforts to ban them even within franchises have cited the
fact that there is no presumption of assent to the restrictive terms, since workers
likely do not even know they exist. The End Employer Collusion Act is a recent
example of a federal effort to eradicate these practices.
69
Conclusion
Amidst the backdrop of falling economic dynamism, today’s heightened policy focus
on non-competes and no-poach agreements reflects a recognition of the growing
empirical research that such provisions often function to prevent workers from
earning what a competitive market would dictate and to stymie the natural labor
market churn that keeps the economy healthy. Few issues bring progressives who care
about worker protections together with conservatives who believe in the power of free
and fair competition as has the proliferation of these restrictive labor agreements.
The result is a rare consensus on the need for reform that has unified state and federal
politicians from both sides of the aisle, state AG offices, and federal antitrust agencies.
This briefer is intended to further inform the debate and present the latest empirical
research in order to guide reform efforts at all levels of government.
15
For Further Reading
1. Krueger and Ashenfelter 2018, “Theory and Evidence on Employer Collusion in
the Franchise Sector.” NBER Working Paper No. 24831.
2. Starr, Prescott, and Bishara 2019, “Non-Competes in the U.S. Labor Force.”
University of Michigan Law & Econ Research Paper No. 18-013, 2019.
3. Marx 2011, “The Firm Strikes Back: Non-Compete Agreements and the Mobility of
Technical Professionals.” American Sociological Review, vol. 76, no. 5, pp. 695-712.
4. Balasubramanian et al. 2018, “Locked In? The Enforceability of Covenants Not to
Compete and the Careers of High-Tech Workers.” US Census Bureau Center for
Economic Studies Paper No. CES-WP-17-09; Ross School of Business Paper No.
1339.
5. Starr, Balasubramanian, and Sakakibara 2018, “Screening Spinouts? Non-
Compete Enforceability and the Creation, Growth, and Survival of New Firms.”
Management Science, vol. 64, no. 2, pp. v-x, 495-981.
6. Garmaise 2011, “Ties that Truly Bind: Noncompetition Agreements, Executive
Compensation, and Firm Investment.” The Journal of Law, Economics, and
Organization, vol. 27, no. 2, pp. 376-425.
Endnotes
1. Molloy, Raven, Christopher L. Smith, Riccardo Trezzi, and Abigail Wozniak, “Understanding Declining Fluidity
in the U.S. Labor Market.” Brookings Institution, 2016, https://www.brookings.edu/wp-content/uploads/2016/03/
molloytextspring16bpea.pdf. Also see: “Dynamism in Retreat.” Economic Innovation Group, 2017, https://eig.org/
dynamism.
2. Mishel, Lawrence, Elise Gould, and Josh Bivens, “Wage Stagnation in Nine Charts.” Economic Policy Institute,
2015, https://www.epi.org/publication/charting-wage-stagnation/. For an assessment from a more conservative
perspective that largely corroborates the same trends, see Strain, Michael “The Link Between Wages and
Productivity is Strong” at https://www.aei.org/wp-content/uploads/2019/02/The-Link-Between-Wages-and-
Productivity-is-Strong.pdf.
3. Starr, Evan, J.J. Prescott, and Norman Bishara, “Noncompetes in the U.S. Labor Force.” U of Michigan Law &
Econ Research Paper No. 18-013, 2019.
4. Girls on the Run of Silicon Valley Volunteer Coach Contract: “As a coach and volunteer for Girls on the Run of
Silicon Valley, I agree to the following: 1.) I will not deliver the Girls on the Run program or any similar program
unless I am working as an employee or volunteer of Girls on the Run. 2.) I may not create or help develop a
program that has similar goals and structure to that of Girls on the Run International within a two year period
of my involvement with Girls on the Run.” Source: Author’s research. This contract is clearly unenforceable in
California under Business and Professions Code Section 16600.
5. Krueger, Alan B., Orley Ashenfelter, “Theory and Evidence on Employer Collusion in the Franchise Sector.”
NBER Working Paper No. 24831, 2018.
6. See California Business and Professions Code Section 16600, which reads “Every contract by which anyone is
restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” Notably,
California will enforce covenants not to compete incident to a sale of business.
16
7. See the March 2016 Treasury Report, “Non-Compete Contracts: Economic Effects and Policy Implications” at
https://www.treasury.gov/resource-center/economic-policy/Documents/UST%20Non-competes%20Report.pdf.
See the White House 2016 Report “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State
Responses” at https://obamawhitehouse.archives.gov/sites/default/files/non-competes_report_final2.pdf. With
regards to new state and federal policy proposals, see https://www.faircompetitionlaw.com/. Some recent laws
include the Workforce Mobility Act (see: https://www.booker.senate.gov/?p=press_release&id=760; https://www.
warren.senate.gov/newsroom/press-releases/warren-murphy-wyden-introduce-bill-to-ban-unnecessary-and-
harmful-non-compete-agreements) and Massachusetts’s new law (https://www.masstlc.org/a-new-era-of-ma-
non-compete-law-begins/).
8. For information on the AG investigations and the role of AGs generally, see Madigan and Flanagan 2018,
“Overuse of Non-Competition Agreements: Understanding How They Are Used, Who They Harm, and What
State Attorneys General Can Do to Protect the Public Interest” at https://lwp.law.harvard.edu/files/lwp/files/
webpage_materials_papers_madigan_flanagan_june_13_2018.pdf. For more details, see https://www.nytimes.
com/2017/10/25/business/economy/illinois-non-compete.html.
9. For DOJ HR Guidance, see: https://www.justice.gov/atr/file/903511/download.
10. Chinn, Lloyd B., Colin Kass, Laura Fant, and Myra Din, “DOJ Announces First Settlement Under Trump
Administration Regarding ‘No-Poach’ Agreement.” Law and the Workplace, Apr. 19, 2018, https://www.
lawandtheworkplace.com/2018/04/doj-announces-first-settlement-under-trump-administration-regarding-no-
poach-agreement. For DOJ No-poach case, see: https://www.law.com/newyorklawjournal/2018/04/11/doj-brings-
first-no-poach-prosecution-since-issuing-antitrust-guidance-for-hr-professionals/?slreturn=20190017224217.
11. See https://www.bna.com/ftc-democrat-urges-n73014482473/.
12. Rohit Chopra (FTC commisioner) remarks on non-competes and other issues related to competition in the
labor market: https://www.ftc.gov/system/files/documents/public_statements/1408196/chopra_-_comment_to_
hearing_1_9-6-18.pdf.
13. Lowensohn, Josh, “Amazon does an about-face on controversial warehouse worker non-compete contracts.” The
Verge, Mar. 27, 2015, https://www.theverge.com/2015/3/27/8303229/amazon-reverses-non-compete-contract-rules.
14. Abrams, Rachel, “8 Fast-Food Chains Will End ‘No-Poach Policies.” New York Times, Aug. 20, 2018, https://www.
nytimes.com/2018/08/20/business/fast-food-wages-no-poach-franchisees.html.
15. See, for example, Council of Economic Advisors October 2016 Issue Brief, “Labor Market Monopsony: Trends,
Consequences, and Policy Responses” available at https://obamawhitehouse.archives.gov/sites/default/files/
page/files/20161025_monopsony_labor_mrkt_cea.pdf.
16. For the concentration statistics based on vacancies, see: Azar, José A., et al. “Concentration in US labor markets:
Evidence from online vacancy data.” NBER Working Paper No. w24395, 2018. For the relationship with wages,
see: Azar, José, Ioana Marinescu, and Marshall I. Steinbaum, “Labor market concentration.” NBER Working
Paper No. w24147, 2017. See also: Benmelech, Efraim, Nittai Bergman, and Hyunseob Kim, “Strong employers
and weak employees: How does employer concentration affect wages?” NBER Working Paper No. w24307, 2018.;
Qiu, Yue and Aaron J. Sojourner, “Labor-Market Concentration and Labor Compensation.” IZA Discussion Papers
12089, 2019.
17. See, for example, recent reports from The Hamilton Project and Center for American Progress, which also
provide an excellent overview of the issues around non-competes. These include Marx, Matt “Reforming Non-
competes to Support Workers,” Hamilton Project Policy Proposal 2018-04; Krueger Alan, and Eric Posner, “ A
Proposal for Protecting Low-Income Workers from Monopsony and Collusion,” Hamilton Project Policy Proposal
2018-05; and Walter, Karla, “The Freedom to Leave: Curbing Noncompete Agreements to Protect Workers and
Support Entrepreneurship, ”Center for American Progress.
18. Woodman, Spencer, “Exclusive: Amazon makes even temporary warehouse workers sign 18-month non-
competes.” The Verge, Mar. 26, 2015, https://www.theverge.com/2015/3/26/8280309/amazon-warehouse-jobs-
exclusive-noncompete-contracts.
19. Rizzi, Corrado, “McDonald’s Facing Antitrust Class Action Over Alleged Wage-Suppression Conspiracy.”
ClassAction.org, Jun. 29, 2017, https://www.classaction.org/blog/mcdonalds-facing-antitrust-class-action-over-
alleged-wage-suppression-conspiracy.
20. The gray area occurs because, in the franchise context, it’s not clear if different establishments owned by
separate franchises should be considered competing entities.
21. Krueger and Ashenfelter, “Collusion in the Franchise Sector.”
17
22. “Justice Department Requires Knorr and Wabtec to Terminate Unlawful Agreements Not to Compete for
Employees.” Department of Justice, press release Apr. 3, 2018.; Hollister, Sean, “Steve Jobs personally asked
Eric Schmidt to stop poaching employees, and other unredacted statements in a Silicon Valley scandal.” The
Verge, Jan. 27, 2012, https://www.theverge.com/2012/1/27/2753701/no-poach-scandal-unredacted-steve-jobs-eric-
schmidt-paul-otellini.
23. Bishara, Norman D., Kenneth J. Martin, and Randall S. Thomas, “An Empirical Analysis of Noncompetition
Clauses and Other Restrictive Postemployment Covenants.” Vanderbilt Law Review, vol. 68, no. 1, 2015.
24. Greenhouse, Steven, “Non-compete Clauses Increasingly Pop Up in Array of Jobs.” New York Times, Jun. 8, 2014,
https://www.nytimes.com/2014/06/09/business/non-compete-clauses-increasingly-pop-up-in-array-of-jobs.
html.
25. Starr, Prescott, and Bishara, “Noncompetes in the U.S. Labor Force.” A smaller but more recent survey finds
similar numbers: Krueger and Posner, “ A Proposal for Protecting Low-Income Workers from Monopsony and
Collusion,” Hamilton Project Policy Proposal 2018-05. A last survey of workers in Utah finds similar numbers:
Cicero (2017), available at https://slchamber.com/noncompetestudy/.
26. For engineers, see: Marx, Matt, “The Firm Strikes Back: Non-Compete Agreements and the Mobility of Technical
Professionals.” American Sociological Review, vol. 76, no. 5, 2011, pp. 695-712. For physicians, see: Lavetti, Kurt,
Carol Simon, and William D. White, “The Impacts of Restricting Mobility of Skilled Service Workers: Evidence
from Physicians.” Journal of Human Resources, 2018. For hairstylists, see: Johnson, Matthew S., Michael Lipsitz,
“Why are Low-Wage Workers Signing Non-compete Agreements?” 2017.
27. According to Beck, Reed and Riden, the number of non-compete cases in 2000 was 527, compared to 993 in 2018.
See their year by year chart at https://www.faircompetitionlaw.com/wp-content/uploads/2019/01/Non-compete-
and-Trade-Secret-Cases-Survey-Graph-20190113-Data-and-Charts.jpg.
28. The Dyer’s case in 1414 is typically looked to as the first judgement against enforcing a non-compete. Review
available here: https://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1189&context=bjell.
29. Gilson, R.J., 1999. “The legal infrastructure of high technology industrial districts: Silicon Valley, Route 128, and
covenants not to compete.” NYU Law Rev., 74, p.575.
30. See: http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0500-0599/0542/
Sections/0542.335.html, Section (1)(g) of 542.335 Valid restraints of trade or commerce.
31. Shubber, Kadhim, “Cushman v the Cleaner: The fight over non-competes.” Financial Times, Oct. 16, 2018, https://
www.ft.com/content/b69d30-ce44-11e8-b276-b9069bde0956.
32. For evidence on the chilling effect of non-competes, see: Starr, Prescott, and Bishara, “Noncompetes in the U.S.
Labor Force.” For evidence on what individuals know about their state laws, see: Prescott, J.J., and Evan Starr,
“The Accuracy and Effects of Beliefs About Non-Compete Laws: Evidence from an Information Experiment.”
Working paper 2019.
33. Starr, Prescott, and Bishara, “Noncompetes in the U.S. Labor Force.”
34. These two studies are Starr, Prescott, and Bishara, “Noncompetes in the U.S. Labor Force.”; Marx, “The Firm
Strikes Back.”
35. For a summary of the issues with knowledge workers, see: Lobel, Orly and James Bessen, “Stop Trying to Control
How Ex-Employees Use Their Knowledge.” Harvard Business Review, Oct. 9, 2014, https://hbr.org/2014/10/stop-
trying-to-control-how-ex-employees-use-their-knowledge.
36. Starr, Prescott, and Bishara, “Noncompetes in the U.S. Labor Force.” In another study, physicians who agree to
non-competes were found to have 12% longer job spells than unbound physicians. See Lavetti, Simon, and White,
“The Impacts of Restricting Mobility.” Note that the Starr, Prescott, and Bishara study found that for the average
labor force participant, the effects of a non-compete on job tenure and the likelihood of leaving the industry are
not statistically different in states that do not enforce non-competes.
37. Balasubramanian, Natarajan, Jin Woo Chang, Mariko Sakakibara, Jagadeesh Sivadasan, and Evan Starr, “Locked
In? The Enforceability of Covenants Not to Compete and the Careers of High-Tech Workers.” US Census Bureau
Center for Economic Studies Paper No. CES-WP-17-09; Ross School of Business Paper No. 1339, Dec. 13, 2018.
38. For patent holders, see Marx, M., Strumsky, D. and Fleming, L., 2009. “Mobility, skills, and the Michigan non-
compete experiment.” Management Science, 55(6), pp.875-889. For executives, see Garmaise, Mark J., “Ties
that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment.” The Journal
of Law, Economics, and Organization, vol. 27, no. 2, 2011, pp. 376-425. For tech workers, see Fallick, Bruce,
Charles A. Fleischman, and James B. Rebitzer, “Job-hopping in Silicon Valley: some evidence concerning the
microfoundations of a high-technology cluster.” The Review of Economics and Statistics vol. 88, no. 3, 2006, pp.
472-481. For workers on LinkedIn, see Jeffers, Jessica, “The Impact of Restricting Labor Mobility on Corporate
Investment and Entrepreneurship.” Working paper.
18
39. Lipsitz, Michael and Evan Starr, “Low Wage Workers and the Enforceability of Noncompetes.”
40. Starr, Evan, Martin Ganco, Benjamin A. Campbell, “Strategic human capital management in the context of
cross-industry and within-industry mobility frictions.” Strategic Management Journal, vol. 39, no. 8, 2018, pp.
2226-2254.; Ewens, Michael, and Matt Marx, “Founder Replacement and Startup Performance.” The Review
of Financial Studies, vol. 31, no. 4, 2018, pp. 1532-1565.; Starr, Evan, Natarajan Balasubramanian, and Mariko
Sakakibara, “Screening Spinouts? Non-Compete Enforceability and the Creation, Growth, and Survival of
New Firms.” Management Science, vol. 64, no. 2, 2018, pp. v-x, 495-981.; Balasubramanian, Natarajan, Mariko
Sakakibara, Evan Starr, and Ramanathan, “The Effect of Curtailing the Enforceability of Physician Non-compete
Agreements on Healthcare Availability.” Working paper.
41. Starr, et al., “Screening Spinouts? Non-Compete Enforceability and the Creation, Growth, and Survival of New
Firms.”
42. Marx, “The Firm Strikes Back.”; Starr, Prescott, and Bishara, “Noncompetes in the U.S. Labor Force.” A third
study documents that after Michigan started enforcing non-competes in 1984 that technical workers were more
likely to switch industries: Berger, T. and Frey, C.B., 2017. “Regional technological dynamism and noncompete
clauses: Evidence from a natural experiment.” Journal of Regional Science, 57(4), pp.655-668.
43. Marx, Matt, Jasjit Singh, and Lee Fleming, “Regional disadvantage? Employee non-compete agreements and
brain drain.” Research Policy, vol. 44, no. 2, 2015, pp. 394-404.; Balasubramanian, et al., “Locked In?”
44. Starr, et al., “Screening Spinouts?”; Stuart, Toby E., and Olav Sorenson, “Liquidity Events and the Geographic
Distribution of Entrepreneurial Activity.” Administrative Science Quarterly, vol. 48, no. 2, 2003, pp. 175-201.;
Samila, Sampsa, and Olav Sorenson, “Non-Compete Covenants: Incentives to Innovate or Impediments
to Growth.” Management Science, vol. 57, no. 3, 2011.; Balasubramanian, et al., “The Effect of Curtailing
Enforceability.”; Marx, Matt, “Punctuated Entrepreneurship (Among Women),” working paper. One study finds
no effects of non-compete enforceability on entrepreneurship: Carlino, Gerald, “Do Non-Compete Covenants
Influence State Startup Activity? Evidence from the Michigan Experiment,” Federal Reserve Bank of Philadelphia
working paper 17-30.
45. Jeffers, “The Impact of Restricting Labor Mobility.” Nevertheless, there are some discrepancies in the growing
literature.
46. Samila and Sorenson, “Non-Compete Covenants: Incentives to Innovate or Impediments to Growth.”
47. Tambe, Prasanna, and Lorin M. Hitt, “Job Hopping, Information Technology Spillovers, and Productivity
Growth.” Management Science, vol. 60, no. 2, 2014, pp. 338-355.
48. Starr, Prescott, and Bishara, “Noncompetes in the U.S. Labor Force.” Conti, Raffaele, “Do Non-Competition
Agreements Lead Firms to Pursue Risky R&D Projects?” Strategic Management Journal, vol. 35, no. 8, 2014, pp.
1230-1248.; Arts, Sam, and Lee Fleming, “Paradise of Novelty – Or Loss of Human Capital? Exploring New Fields
and Inventive Output.” Organization Science, vol. 29, no. 6, 2018, pp. 989-1236.; Starr, Evan “Consider This:
Training, Wages, and the Enforceability of Covenants Not to Compete.” Industrial and Labor Relations Review
(forthcoming).; Jeffers, “The Impact of Restricting Labor Mobility.”; Shi, Liyan, “Restrictions on Executive
Mobility and Reallocation: The Aggregate Effect of Non-Competition Contracts.” Working paper. However,
there is another study that documents a negative relationship between non-compete enforceability and firm
investment per capita: Garmaise, “Ties that Truly Bind.”
49. Samila and Sorenson, “Non-Compete Covenants.”; Belenzon, Sharon, and Mark Schankerman, “Spreading the
Word: Geography, Policy, and Knowledge Spillovers.” The Review of Economics and Statistics, vol. 95, no. 3, 2013,
pp. 884-903.
50. See Topel, Robert H., and Michael P. Ward, “Job Mobility and the Careers of Young Men.” Quarterly Journal of
Economics, vol. 107, no. 2, 1992, pp. 439-470, noting that wage gains at job changes account for at least one third
of early career wage growth.
51. One study finds that after Michigan started enforcing non-competes the workers who switched industries earned
lower wages relative to a set of control states: Berger and Frey, “Regional dynamism and noncompete clauses.”
52. Garmaise, “Ties that Truly Bind.”; Starr, “Training, Wages, and the Enforceability of Covenants Not to Compete.”
53. Balasubramanian, et al., “Locked In?”
54. Starr, “Training, Wages, and the Enforceability of Covenants Not to Compete.”; Lipsitz and Starr, “Low Wage
Workers and the Enforceability of Noncompetes.”
19
55. One study finds that executives are worse off in states that enforce non-compete agreements: Garmaise, “Ties
that Truly Bind.”; Kini, Omesh, Ryan Williams, and Sirui Yin, “Restrictions on CEO Mobility, Performance-
Turnover Sensitivity, and Compensation: Evidence from Non-Compete Agreements.” Working paper.; Cadman,
Brian D., John L. Campbell, and Sandy Klasa, “Are Ex-Ante CEO Severance Pay Contracts Consistent with
Efficient Contracting?” Journal of Financial and Quantitative Analysis, vol. 51, no. 3, 2016, pp. 737-769.; Goldman,
Eitan Moshe, and Peggy Peiju Huang, “Contractual vs. Actual Separation Pay Following CEO Turnover.”
Management Science, vol. 61, no. 5, 2014.; Shi, “Restrictions on Executive Mobility.” A final paper shows that
executives can overcome the unenforceability of non-competes through strategically ambiguous contracting
practices: Sanga, Sarath 2018, “Incomplete Contracts: An Empirical Approach,” Journal of Law, Economics, and
Organization 2018.
56. One nationally representative study finds that workers bound by non-competes earn 6% higher wages, but that
these wage gains are not shared equally across all non-compete signers. In particular, the wage gains accrued to
those provided with early notice of the non-compete, and not to those who received notice of the non-compete
after accepting their job offer. Starr, Prescott, and Bishara, “Noncompetes in the U.S. Labor Force.”
57. Starr, Evan, Justin Frake, and Rajshree Agarwal, “Mobility Constraint Externalities.” Organization Science
(forthcoming).
58. Younge, Kenneth A., and Matt Marx, “The Value of Employee Retention: Evidence from a Natural Experiment.”
Journal of Economics & Management Strategy vol. 25, no. 3, 2016, pp. 652-677.; Younge, Kenneth A., Tony W.
Tong, and Lee Fleming, “How anticipated employee mobility affects acquisition likelihood: Evidence from a
natural experiment.” Strategic Management Journal vol. 36 no. 5, 2015, pp. 686-708. Garmaise, “Ties that Truly
Bind,” finds no effect on firm value, however.
59. Kang, Hyo, and Lee Fleming, “Non-Competes and Business Dynamism.” Searle Center Working Paper Series
(2017-046).
60. Chandler, Mark, “HP Sues Employees for Leaving – We Challenge HP to Support Employee Freedom.” Cisco
Blogs, Nov. 23, 2011, https://blogs.cisco.com/news/hp-sues-employees-for-leaving.
61. Nunn, Ryan and Evan Starr, “The Co-Adoption of Overlapping Restrictive Employment Provisions,”
forthcoming.
62. Starr, Prescott, and Bishara, “Noncompetes in the U.S. Labor Force.”; Prescott and Starr, “Accuracy and Effects of
Beliefs About Non-Compete Laws.”
63. See the Massachusetts’s law at https://www.faircompetitionlaw.com/2018/08/06/massachusetts-new-
noncompete-law-the-text/.
64. See the text of the Oregon statute at https://www.oregonlaws.org/ors/653.295.
65. For the MOVE Act, see: https://www.congress.gov/bill/114th-congress/senate-bill/1504. For the Freedom to
Compete Act, see https://www.rubio.senate.gov/public/_cache/files/7563e7ae-ca85-423b-b3e8-b44ce3b4eb54/1D
C3C59DB28D9D2D273ACEB3087742E4.the-freedom-to-compete-act.pdf. See the Illinois low wage ban (Freedom
to Work Act) at http://www.ilga.gov/legislation/publicacts/99/PDF/099-0860.pdf. See the Massachusetts’s law at
https://www.faircompetitionlaw.com/2018/08/06/massachusetts-new-noncompete-law-the-text/. See the text of
the Oregon statute at https://www.oregonlaws.org/ors/653.295.
66. Saxenian, A., 1996. Regional advantage. Harvard University Press. Gilson, “The legal infrastructure of high-tech
districts.” Hyde, A., 2003. Working in Silicon Valley: Economic and Legal Analysis of a High Velocity Labor
Market. ME Sharpe, Armonk, New York.
67. Those in the pro-non-compete camp are quick to point out that other states that do not enforce non-competes,
like North Dakota and Oklahoma, are not necessarily known as homes for innovation and entrepreneurship.
See: Barnett, Jonathan, and Ted M. Sichelman, “Revisiting Labor Mobility in Innovation Markets.” US CLASS
Research Paper No. 16-13; USC Law Legal Studies Paper No. 16-15.
68. See: Vaheesan, Sandeep, “Antitrust Law: A Current Foe, but Potential Friend, of Workers.” 2018, https://lwp.law.
harvard.edu/files/lwp/files/webpage_materials_papers_vaheesan_june_13_2018.pdf.
69. See “Booker, Warren Introduce Bill to Crack Down on Collusive ‘No Poach’ Agreements.” Office of Cory Booker
press release, Feb. 28, 2018, https://www.booker.senate.gov/?p=press_release&id=760.
About the author
Evan Starr is one of the world’s leading experts on restrictive employment
covenants. His research examining how the use and enforceability of
covenants not to compete affect workers, firms, and regions has appeared
in several leading academic journals in business and economics, and has
been covered by prominent news outlets including the New York Times, the
Washington Post, the Wall Street Journal, NPR, and the Financial Times.
Dr. Starr is an Assistant Professor at the University of Maryland, Robert
H. Smith School of Business. He received his B.A. in Economics,
Math, and Spanish from Denison University, and a Master’s and
PhD in Economics from the University of Michigan.
About the Economic Innovation Group (EIG)
The Economic Innovation Group (EIG) is an ideas laboratory and advocacy
organization whose mission is to advance solutions that empower
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States Must Act to Protect Workers From Exploitative Noncompete and No-Poach
Agreements
americanprogress.org/article/states-must-act-protect-workers-exploitative-noncompete-no-poach-agreements
An employee places food on the counter at a Port St. Lucie, Florida, restaurant in August 2016. (Getty/UIG/Jeffrey Greenberg)
Despite years of economic growth, many Americans’ pay has not improved. Since the Great Recession, overall wage growth has only slightly
outpaced inflation, and the earnings of African Americans have still not recovered. Meanwhile, business startup rates are falling across all
industries, and many economists argue that this decline is dragging down U.S. innovation and productivity growth. As a result, policymakers
across the United States are interested in reforms to boost worker pay, increase job mobility, and enable Americans to start their own
companies. In particular, state lawmakers are debating actions to protect workers from restrictive employment contracts that keep them locked
in jobs they do not want but cannot leave.
From fast-food workers and check-cashing clerks to physicians and engineers, corporations are increasingly subjecting workers across income
and educational attainment levels to agreements that restrict future employment. One recent survey found that nearly 1 in 5 U.S. workers
report that they are currently subject to a noncompete agreement that prevents them from moving to a competing employer, while another
found that more than half of corporate franchisors require franchisees to sign no-poaching agreements that prevent their workers from moving
between locations.
But the damage of these agreements extends beyond mobility impacts for individual workers. The wages of all workers are lower in states
where corporations have maximal power to enforce noncompete agreements. Moreover, several studies indicate that strengthening
noncompete protections for workers is associated with an increase in patents and firm startups—and that doing so could help new firms to
attract top talent.
Although federal action on this issue is unlikely in the near term, state lawmakers have considerable power to protect low- and middle-wage
workers from abusive employment contracts. For example, Illinois and Massachusetts have enacted laws in recent years to protect low-wage
workers from noncompete agreements, and Washington state Attorney General Bob Ferguson is leading a fight to stop corporate franchisors
from requiring their franchisees to sign no-poach agreements.
This primer—based on a 2019 Center from American Progress report, “The Freedom to Leave: Curbing Noncompete Agreements to Protect
Workers and Support Entrepreneurship”—provides important background for lawmakers and advocates who are interested in strengthening
state-level noncompete and no-poach protections. First, it provides a brief explanation of how noncompete and no-poach contracts are
reducing wages and harming growth. It then details policy recommendations that states can adopt to protect workers from abusive agreements.
Finally, the primer includes a table that illustrates how each state’s existing laws compare with CAP’s recommendations.
How do noncompete and no-poaching agreements restrict workers’ mobility?
A noncompete agreement is a contract that requires a worker to agree not to become an employee of a competing company or start a competing
company for a specific period of time after leaving a firm. Typically, corporations require a worker to sign such an agreement at the start of a
new job or position. Workers often receive little advanced warning of the requirement, usually get no payment during the waiting period, and—
even if they suspect that an agreement is illegal—have little recourse to fight in the courts since legal remedies in these cases typically do not
require employers to pay penalties or back pay to aggrieved workers.
As a result, research finds that these agreements have a significant impact on job mobility. Academic research found that job mobility in
Michigan fell by 8 percent after the state started allowing the enforcement of noncompete agreements. Meanwhile, a 2017 U.S. Census Bureau
paper found that tech workers in states that enforce noncompete agreements had 8 percent fewer jobs over an 8-year period compared with
workers in states that do not allow enforcement of noncompete agreements.
No-poaching agreements lead to similar mobility restrictions on fast-food and other franchise workers, but without workers’ prior knowledge.
These agreements are often included in voluminous and confidential contracts that corporations require individual franchisees to sign in order
to operate a business under the corporation’s name. Workers typically find out about this limitation when they attempt to move to another
store in the franchise chain that provides better career advancement opportunities, hours, pay, or working conditions.
State attorneys general are adopting strategies to aggressively enforce existing state laws in order to prevent the use of franchise no-poaching
agreements. They argue that these agreements violate state and federal antitrust laws that were enacted to prevent anticompetitive practices
such as employers from colluding to keep wages low. Yet corporate franchises often claim that a franchisor and its franchisees should be held to
a different standard since they function as a single entity rather than as competitors.
How are noncompete and no-poach agreements reducing all workers’ wages?
When workers are subject to these sorts of agreements, their ability to bargain for better wages is reduced since they cannot leave a job for a
competitor or to start their own company. While corporations have long required that CEOs and top talent sign agreements not to join rival
firms for a certain period of time, today more than 38 percent of workers across all educational levels—and 35 percent of those without a
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college degree—report signing a noncompete agreement at some point in their lives. Moreover, barring franchises from recruiting the skilled
employees of another franchise can drive down workers’ wages in industries where wages are already very low. For example, fast-food cooks
earn an average hourly wage of $10.39 per hour, or $21,610 annually, according to the Bureau of Labor Statistics.
The prevalence of these agreements harms all workers. According to a 2016 report from the U.S. Department of Treasury, living in a state with
strict enforcement of noncompete contracts, compared to one with the most lenient enforcement, is associated with a 5 percent reduction in
pay for a typical 25-year-old worker—and this penalty grows to 10 percent for the typical 50-year-old worker.
Even in California—where courts are not permitted to enforce noncompete agreements—corporations require workers to sign them at rates
similar to those of workers in other states, perhaps because of the agreements’ chilling effects on job mobility and wages. Indeed, to support
robust wage growth, state lawmakers must not only tackle how courts enforce noncomplete laws but also support policies to ensure that
workers are not forced to sign these agreements in the first place.
How are restrictive employment contracts harming entrepreneurship and regional growth?
Allowing workers to move easily between firms can help stimulate the economy as a whole by fostering innovation through information-
sharing; entrepreneurship as workers leave jobs to start new companies; and even regional industry development—since firms can co-locate to
share local talent pools.
Conversely, the negative consequences of limiting job mobility through strict enforcement of noncompete agreements can spread throughout a
state’s economy. For example, studies have found that stricter enforcement of noncompete agreements reduces the number of new firms
entering a state, lowers firm survival rates, reduces startup size, and even delays entrepreneurship among women. Moreover, a 2011 study
reviewing nine years of data found that venture capital funding had stronger positive effects on the number of patents licensed and firm
startups in states with weaker enforcement of noncompete agreements.
Finally, strict enforcement of noncompete contracts can deplete local talent pools by requiring skilled workers to leave their industry of
expertise or relocate out of state to avoid geographic restrictions. For example, a 2011 study of engineers found that about one-third of workers
who signed noncompete agreements left their chosen industry when they changed jobs.
What should states do to better protect workers?
To help raise wages and jump-start entrepreneurship, state policymakers should take the following steps, as detailed in the aforementioned
“Freedom to Leave” report: ban noncompete agreements for most workers, ban franchise no-poaching agreements, and give workers and
enforcement agencies the tools they need to enforce their rights.
1. Ban noncompete contracts for most workers
States should limit noncompete contracts to the small portion of workers with the power to bargain over these agreements. In order to protect
low- and middle-wage workers, states should ban these types of contracts for all workers earning less than 200 percent of the state’s median
annual wage. In addition, lawmakers should prohibit companies that employ at least 50 workers from requiring more than 5 percent of their
workforce to sign such a document. These protections should extend to independent contractors as well.
2. Ban franchise no-poaching agreements
States should ban all no-poaching agreements among franchises. While several state attorneys general, under the authority of existing state
antitrust laws, are taking action against fast-food corporations and other corporate franchisors that require franchisees to sign no-poaching
agreements, clarifying legislation would help to ensure that courts do not rule against workers in the future and that corporations understand
that no-poaching agreements are banned in all forms.
3. Give workers and enforcement agencies tools to enforce their rights
Existing laws place a considerable burden on workers to both know their legal rights and be willing to take on a former employer in court in
order to protect themselves. States should empower workers to stand up for themselves and should bolster enforcement agencies’ ability to
protect workers by requiring companies to disclose all noncompete requirements in job postings and job offers; establishing significant
penalties for use of illegal noncompete and no-poaching agreements; designating and funding enforcement agencies to pursue these sorts of
cases; and allowing workers to sue companies that violate their rights.
How do existing state laws stack up?
Lawmakers in several states—including Maine, New Jersey, New York, Virginia, and Washington—are debating policies to protect low- and
middle-wage workers from exploitative noncompete agreements and to ban franchise no-poaching agreements.
To help advance this debate, CAP reviewed existing state statutes governing these kinds of agreements; some—but by no means all—major
cases on the topic; and numerous resources that summarize how state courts have interpreted statutes and existing case law governing
restrictive contractual agreements. The table below represents CAP’s effort to detail how existing state statutes and case law stack up to CAP’s
recommended reforms.
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No state goes far enough under existing laws to protect workers from abusive noncompete and no-poaching agreements. For example, CAP was
unable to find any existing state laws that clarify that franchise no-poaching agreements are illegal. Moreover, most existing state laws that
regulate noncompete agreements focus on how courts should adjudicate legal disputes or protect only a small subset of workers, rather than
banning these sorts of agreements in the first place.
Finally, it is important to note that while a few states have enacted laws that explicitly allow workers who are subject to exploitative agreements
to collect penalties, more general state labor protections—which are not the focus of this table—may help provide workers some recourse. For
example, California has enacted a number of laws to ensure that workers can pursue claims against employers in state courts and are not forced
to sign away their rights. State lawmakers can boost wages and encourage entrepreneurship by banning contracts to restrict workers’ job
mobility. While lawmakers should closely review existing state laws, this resource is a useful tool for lawmakers and advocates working to spark
debate and implement these sorts of reforms.
A downloadable version of this table is available at https://cdn.americanprogress.org/content/uploads/2019/03/29105833/State-
Noncompetes-Table.pdf.
A full list of sources for the second column of this table is available at
https://cdn.americanprogress.org/content/uploads/2019/03/27132622/State-Noncompetes-Table-SOURCES.pdf.
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Karla Walter is the director of Employment Policy at the Center for American Progress.
The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of
American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous
supporters who make our work possible.
Authors
Karla Walter
Senior Director, Employment Policy
1/5
Forum: It is time for the Legislature to ban noncompete
clauses
startribune.com/it-is-time-for-the-legislature-to-ban-noncompete-clauses/566887432
Business 566887432
With a few very important exceptions, very few circumstances justify barring an employee
from going to a competitor.
By Wm. Christopher Penwell Special to the Star Tribune
January 12, 2020 — 2:56pm
GLEN STUBBE • [email protected]
Minnesota Attorney General Keith Ellison, along with several other attorneys general, want
to get rid of noncompete clauses.
On Nov. 15, Minnesota Attorney General Keith Ellison submitted a letter to the Federal Trade
Commission signed by attorneys general from 19 states asking the FTC to “bring an end to
the abusive use of non-compete clauses in employment contracts.”
The letter endorses the arguments in a 53-page rule-making petition submitted to the FTC by
a host of organizations and individuals. The petition asks the FTC to abolish noncompete
clauses in the employer/employee context.
2/5
The Star Tribune on Dec. 1 reported that “across the country, lawmakers and labor activists
are striking back at noncompetes.” Similar articles are appearing in publications around the
country.
Absent from these discussions is any mention of the difference between noncompete clauses
and nonsolicitation clauses. A noncompete clause restricts an employee from going to work
for a competitor at all. A nonsolicitation clause restricts an employee from soliciting
customers but allows the employee to go to work for a competitor.
With a few very important exceptions, very few circumstances justify barring an employee
from going to a competitor. Nonetheless, at least 75% of the employment agreements I
review have a noncompete clause. The clause is included to intimidate employees without
any thought to whether the clause is legitimately needed for the employer’s protection. Well,
the chickens are coming home to roost — there is a growing movement against the
indiscriminate use of noncompete clauses as a club.
In contrast to noncompete clauses, there are very good reasons for limiting a departing
employee’s ability to solicit the customers with which he or she has developed strong
relationships. The employer provides training and support and pays the salesperson to
develop strong relationships that bind the customer to the company. It’s not fair for the
employee to leave and take those customers.
The problem is that some states’ laws make no distinction between noncompete clauses and
nonsolicitation clauses. California and North Dakota, for example, prohibit any “contract by
which anyone is restrained from engaging in a lawful profession, trade, or business of any
kind.” Oklahoma, on the other hand, does make the distinction and effectively converts a
noncompete clause in an employment contract into a customer nonsolicitation clause.
Massachusetts allows noncompetes but requires the employer to pay the employee 50% of
the employee’s wages during the period of the noncompete. Other states take different
approaches.
I’m aware of efforts by Minnesota legislators to abolish noncompete clauses going back as far
as 2013. It seems inevitable that legislation in this area will eventually gain traction. But a
pendulum that swings far one way eventually swings far in the other direction. In the rush to
end the abusive use of noncompete clauses, politicians are apt to use a sledgehammer instead
of a scalpel.
Politicians love to cite the exception as if it were the rule; hence the frequently used example
of when Jimmy John’s made its sandwich-makers sign noncompetes. Clearly abusive. But
legislation barring any restriction on a departing employee would allow an employee to take a
large percentage of an employer’s customers with him. This is a real issue for many small
businesses which, if they survive the loss of revenue, have to, among other measures, lay off
employees.
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I’ve seen this issue from both sides during my 35-year law career. Most of my career I
represented employers, but the past few years I have represented far more employees than
employers. In truth, Minnesota has a well-developed body of case law in this area that is fair
to both sides. Unfortunately, most employees do not have the financial wherewithal to
challenge overly restrictive employment agreements and too often they are forced to abide by
those restrictions. Legislation that bans noncompetes except under limited circumstances,
provides employees with expedited access to the courts and requires employers to pay the
employee’s attorneys’ fees if the court narrows, or voids altogether, the post-employment
restrictions would go a long way toward leveling the playing field while leaving existing case
law intact. It may seem odd for me to urge employers to be proactive about getting such
legislation passed but, if they don’t do it soon, the sledgehammer will fall and they may not
like the outcome.
Wm. Christopher Penwell is an attorney and mediator with Siegel Brill PA. For 35 years he
has provided legal advice and representation to closely held companies and employees.
Editor’s note: Write for Business Forum. Submissions should run 750 to 900 words and
avoid promoting individual businesses. Submissions will be edited for publication and run at
the discretion of the editor. Submissions can be sent to [email protected] ◄
7
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1/5
Psychiatrists push to end noncompete agreements in
Minnesota
mprnews.org/story/2020/02/12/psychiatrists-push-to-end-noncompete-agreements-in-minnesota
Business & Economy
Some contend the contracts harm patients and worsen the provider shortage, but hospitals
say they keep the costs of health care down
Alisa Roth
February 12, 2020 10:00 AM
Some health care systems don’t want their providers to change jobs and are trying to stop them by way of
noncompete agreements. Erica Burger is a psychiatry resident who turned down two jobs in Duluth
because of noncompete agreements.
Christine T. Nguyen | MPR News
When scouting for her first full-time job as a psychiatrist, Erica Burger set her sights on
Duluth. She and her husband, lured by the region’s outdoors scene and quality of life, even
started looking for houses to buy.
2/5
Burger interviewed for openings at both of the two main health care systems there. The jobs
came with good salaries and benefits. But they also came with what ultimately became deal-
breakers: noncompete agreements. That meant if Burger left her employer, she wouldn’t be
allowed to work as a psychiatrist in the Duluth area for two years.
Burger, who will finish her psychiatry residency in the Twin Cities in July, said that would
have left her patients in limbo. She declined both jobs, is considering openings in other cities
and is working with lawmakers to end the practice of noncompete contracts for doctors in
Minnesota.
“My primary responsibility is to my patient,” she said. “It just seems like the business
interests are getting in the way of that very essential physician-patient relationship.”
Noncompete agreements are allowed in just about every industry in Minnesota — the only
exception is for lawyers. Now some state lawmakers want to change that. State Rep. Alice
Mann, DFL-Lakevile, a physician herself, is reintroducing a bill that would ban noncompete
agreements for doctors. During the last session, legislation advanced through committees but
never made it to a final vote.
Experts say the use of noncompete clauses across the country is growing. But a number of
states, including California, Massachusetts and North Dakota, restrict them either completely
or under certain circumstances. Critics say contracts harm patients and worsen the provider
shortage.
But health care companies say they need noncompete agreements to protect their
investments in staff and equipment, ultimately saving everybody money on health care costs.
Jon Pryor, a physician who oversees Essentia’s operations in parts of Minnesota and
Wisconsin, said there are all kinds of expenses that can be lost when an employee leaves.
“Recruitment fees to bring somebody here, the salary, you hire support staff, you hire
equipment for somebody,” he said. “That’s a large investment that ultimately one way or
another, directly or indirectly, ends up in a patient’s bill.”
It’s a position shared by the Minnesota Hospital Association and others in the field.
“With a physician shortage, hospitals and communities could experience constant bidding
wars to attract and retain physicians,” a statement from the hospital association said.
“Eliminating noncompete agreements could lead to even greater challenges for rural
communities already struggling with physician recruitment.”
Officials with St. Luke’s, the other large health system in Duluth, which also uses
noncompetes, declined to comment for this story.
If Burger, the psychiatrist, took one of the jobs in Duluth and ever left it, she would have to
3/5
Jon Pryor
Courtesy of Essentia
give up her patients because she’d have to leave the city — or not work as a psychiatrist there
for two years.
The noncompete language even applied to places she was working remotely. If she were
offering telepsychiatry in International Falls, Minn., for example, Burger said she wouldn’t be
allowed to work around International Falls for two years either.
Other mental health workers can also be restricted by noncompete agreements.
Coral Popowitz, a therapist who runs a small clinic in Willow River, a remote town in
northern Minnesota, said the relationship between mental health care providers and their
patients is more personal than for a lot of other specialties — because patients are opening up
to their psychiatrist or therapist in different ways than they would to, say, an orthopedist or
dentist.
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Coral Popowitz.
Courtesy photo
“They share their deepest hurts and fears,” she said, “things that they may not be able to
speak to anyone else in their life.”
Last year, Popowitz hired three therapists who had been working for a bigger mental health
care provider in the area.
All three were under noncompete agreements.
5/5
When they joined the new practice, Popowitz started getting cease-and-desist letters from
their former employer.Worried about what might happen, the three stopped working for
several months.
Their former clients, meanwhile, weren’t getting treatment. Popowitz said everybody in her
office was on pins and needles, worried that something might happen to those clients.
To her, it’s hard to understand the noncompetes because there is such demand for people
who work in mental health care, especially in rural areas like where she works.
Burger agrees.
“I get a ton of like recruiter emails,” she said. “I get phone calls, I get texts, I get letters in the
mail for job positions. There’s such a shortage of psychiatrists.”
Mann, the state lawmaker, may also introduce a bill this session that would ban noncompetes
not just for doctors but in other industries, which would cover therapists and other mental
health care workers.
Essentia requires noncompete agreements for most specialties. It’s currently reconsidering
its policies, particularly when it comes to telepsychiatry.
The therapists at the clinic in Willow River are working again, despite those cease-and-desist
notices. There’s enough demand in the area that their calendars are full, and they’re looking
to hire another colleague.
Have you been asked to sign a noncompete agreement in your health care job? Have you
lost a doctor thanks to a noncompete agreement? We want to hear from you. Call Alisa
Roth at 651-290-1061 or email her at [email protected].
This reporting is part of Call to Mind, our MPR initiative to foster new conversations about
mental health.
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