Why Are Noncompete Agreements So Common?

Businesses say noncompete agreements protect their interests -- but when they apply to everyone from VPs to janitors, are they overkill? Learn how noncompetes work in this episode of BrainStuff: https://money.howstuffworks.com/noncompete-agreements-news.htm

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Episode Transcript

Speaker 1 (00:01):
Welcome to brain Stuff production of iHeart Radio. Pay brain
Stuff Lauren bog Obam Here. If you're working for a
company that you don't like and decide to go work
for its competitor instead, will that first company come after
you for switching jobs? That can depend on whether you
signed a noncompete agreement. A noncompete agreement is a type

(00:26):
of contract that prevents an employee from working for a
competitor within months or even years after leaving a particular company.
In other words, non compete clauses are designed to protect
an employer against workers taking their talents and trade secrets
to the competition. That might make sense for high paid

(00:46):
corporate executives, TV anchors or tech workers whose sudden departure
to the competition would pose a real threat. But the
wild thing about non compete agreements is that American employers
have asked all types of workers at all age levels,
design them home health workers, sandwich shop employees, even dog walkers.

(01:07):
According to data published in the Journal of Law and Economics,
around one in five American workers are bound by a
noncompete agreement. For the article this episode is based on
How Stuff Works. Spoke with study co author Evans Starr,
an assistant professor of Management and organization at the Robert H.
Smith School of Business at the University of Maryland. He said,

(01:28):
you'll find noncompete agreements in every corner of the US
labor market. They're being signed by interns, minimum wage workers,
even volunteers for nonprofits in states like California that won't
even enforce noncompete agreements. According to STARS Research, nearly of
the eleven thousand, five hundred and five U S workers
that he surveyed have signed a noncompete agreement at some

(01:51):
point in their careers, and eight are currently bound by one.
That includes one third of workers earning forty dollars a
year or less. Another study by the Economic Policy Institute
found that tent of employers paying less than thirteen dollars
an hour required their workers to sign noncompete agreements. Of

(02:12):
the folks in the top earning tier of their study,
those making fifty and above, thirty six point five percent
had signed noncompetes. So do noncompete agreements serve a legitimate purpose?
The classic argument in favor of noncompete agreements is that
they take some of the risk out of hiring and

(02:32):
training new employees. Companies invest time and resources in training
their workers, and part of that training includes sharing inside information,
maybe even trade secrets, about how the companies do business.
Starr said, if the worker is allowed to walk across
the street and join a competitor, then that puts the
firm at a competitive disadvantage. The company had to create

(02:55):
that information and spend lots of money developing it. Another
argue in favor of noncompete clauses is that workers aren't
technically forced to sign them. They can be negotiated as
part of the overall employment contract. If a worker feels
like they're giving up too much by signing an oncompete clause,
they can ask for a higher salary or walk away.

(03:16):
In reality, though, very few people are in a position
to negotiate, or perhaps they don't consider it a hill
worth dying on, and Starr said less than ten percent
of workers negotiate over their noncompete agreement. More than five
percent of the time, when a worker is presented with
a noncompete agreement, they simply sign it. If you're one

(03:37):
of the millions of Americans who have signed noncompete and
you might assume that very few of these contracts are
ever enforced, companies would only go after the big fish right.
A Wall Street Journal analysis found that non compete lawsuits
increased by six from two thousand to A star said,
there are about a thousand non compete lawsuits a year,

(04:00):
and you'll find all sorts of workers that you'd never
expect to be in the legal record. Consider the home
health aid who was sued by his Pittsburgh based agency
when he tried to leave and work for a rival company.
Or the famous case of the janitor who was sued
by her billion dollar employer Kushman in Wakefield when she
tried to work for arrival cleaning business. Of the company

(04:21):
dropped the case after a public outcry. Relatively few noncompete
lawsuits ever go to court, though the very existence of
these agreements is usually enough to intimidate workers, whether you're
a janitor or a manager, from leaving for a better
paid job with the competition. They often use broad language,
not just prohibiting employees from going to a competitor, but

(04:42):
stipulating that the employee will have to pay the company's
legal fees should the case go to court. Often, threatening
letters from a company's lawyers stop employees before a case
gets that far, but if it does go to court,
judges generally stick to the janitor rule when determining the
enforceability of a noncompete agreement. A contract is unenforceable if

(05:03):
it's so broad that it prevents a worker from taking
any job with a competitor, including a janitor. A Star
argues that noncompete agreements are not only bad for the
workers who signed them, but also for the entire US
labor market, employers included. He said, Let's say that in
a certain market, sector of the workers are bound by

(05:24):
noncompete agreement. If you're a firm trying to fill a position,
it's going to be really hard to hire an experienced
worker because everybody is bound by noncompete agreements. The Star's
research shows that noncompete agreements come up the labor market,
driving down wages, slowing the hiring process, and making it
less likely for workers not signing a noncompete to receive

(05:45):
a job offer. As of right now, various types of
noncompete agreements are enforceable in forty states. Only California, North Dakota,
and Oklahoma have outlawed noncompetes for all workers. A handful
of other states like Maryland have also banned noncompete agreements
for low wage workers, but in early July, President Joe

(06:07):
Biden signed an executive order calling on the Federal Trade Commission,
or FTC, to ban or limit the use of noncompete
agreements in employee contracts. The FTC now has to consider
how aggressively it wants to take this issue on. It
could ban non competes from being used in low wage jobs,
which some states have done, or it could impose rules
to make the process more transparent. For example, lots of

(06:30):
workers are asked to sign noncompete agreements on their very
first day on the job, when they've already negotiated their
pay and benefits. The FTC could require early notice for
such agreements. Star believes that in most cases, non competes
aren't necessary at all. If a company really wants to
protect its trade secrets, then it can have workers sign

(06:51):
non disclosure agreements or n d as. If a business
wants to protect its investment in clients, then it can
have workers sign and non solicitation agreement, which would forbidden
employee from soliciting customers of the business they just left
for a certain period of time. Four job sectors that
require months or years of training. There are even contracts
that require a worker to pay back a portion of

(07:13):
their training costs if they leave within two years. Starr said.
The key difference is that all of those other agreements
are directly tied to the interest that the business is
trying to protect, but unlike noncompete agreements, they don't restrict
where workers can go. Today's episode is based on the

(07:35):
article non compete agreements target janitors as well as vps,
But why? On how stuff works dot Com written by
Dave Rhodes. Brain Stuff is production of iHeart Radio in
partnership with how stuff Works dot Com, and it is
produced by Tyler Clang. Four more podcasts for my heart Radio,
visit the iHeart Radio app, Apple Podcasts, or wherever you
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