After 22 years working as a nurse in a Wisconsin hospital, Laura wanted a change. Finding a new job would have been hard enough but there was a bigger hurdle: a non-compete clause in her employment contract stipulated she could not work for a rival within 30 miles for at least two years. That did not leave many options for the single mother of three.
“I knew they weren’t paying me fairly,” said Laura, who asked not to use her real name because she had also signed a confidentiality agreement. When she told her bosses she planned to leave, “they very much threatened me”, saying she would be ineligible for her annual bonus and would have to run job applications past them, which she refused to do.
The 75-minute drive to her new job at a university medical centre across the state border in Illinois now takes her past several other hospitals that were off limits.
Laura is among the tens of millions of US workers caught by onerous non-compete clauses. These prevent employees from working for a rival or setting up a competing business for a period of time after they leave a job. Workers lose their earnings for the months they do not work — or face hefty financial penalties or drawn out legal battles if they break the agreement.
Such contracts are most commonly aimed at preventing high-earning professionals, such as financiers and software engineers, from jumping to a competitor armed with valuable inside information. But in recent years, they have become more widespread, catching those on far lower salaries — from fast-food workers to security staff — as employers use them as a tool to retain staff and minimise hiring costs in a competitive labour market. “It is not limited to technical industries and senior leadership at companies,” said David Cabrelli, a professor of labour law at Edinburgh Law School. “It has funnelled down.”
The restrictions are cropping up globally — from the UK, where more than a quarter of the workforce, or about 10mn people, are subject to non-compete clauses, according to a January report from the Competition and Markets Authority, to Australia, where about 22 per cent of workers are hit. But they are particularly widespread in the US. At least 30mn Americans are working under a non-compete agreement, while as many as 63mn people — or 38 per cent of the workforce — have signed at least one in their career, according to a report by the US Treasury Department.
Experts warn such contracts distort the labour market: slowing hiring, depressing wages and potentially stalling business . “High levels of friction on exits is really costing the US economy . . . and really causing huge inequality,” added Cabrelli.
Non-compete clauses were designed to protect companies’ trade secrets and safeguard their relationships with customers. They date back centuries: the first known legal case is reported to have involved an apprentice in England in 1414. But, as many sectors have become inundated with restrictions, employers have at times distorted those original intentions by making the terms broader and more egregious, even if enforcement is patchy.
Deborah Brantley, a bar worker in her 20s, is one example. In a submission to the Federal Trade Commission, a US agency that works in the interests of American consumers and is proposing a ban on non-compete clauses, she described being caught by a restriction while working at a bar in Florida, where she made $10 an hour. After a year, she got a new job at a family-owned bar nearby. Only then did Brantley become aware she had signed a non-compete agreement. Her employer tried to sue her for $30,000 for breaching the contract, which banned her from working at a competitor within 50 miles for two years. In her FTC submission, Brantley wrote: “What trade secrets can a bartender possess?”
Such extreme examples have triggered a backlash among the public and policymakers, which is starting to bring about change.
In 2016, US fast-food chain Jimmy John’s scrapped a policy asking its sandwich-makers to sign agreements that prevented them from working at a similar business nearby for two years, following an investigation by the New York attorney-general’s office.
Instances such as Jimmy John’s “are not what non-competes were designed for”, said Russell Beck, an attorney in Boston who sat on a working group on the issue under the Obama administration. “There are all these abuses, and we need to curb them.”
Policymakers are now stepping up efforts to make reforms. The FTC will on Tuesday hold a vote on whether to adopt its proposal to ban most non-competes, a move the agency hopes could boost wages in the US by $300bn annually. Lina Khan, who chairs the FTC and is attempting to usher in a more pro-labour era, said last year that “the freedom to change jobs is core to economic liberty and to a competitive, thriving economy.”
The UK government is also planning to restrict the length of non-compete clauses to three months, although there is little prospect of that happening before the general election expected this year.
Public interest in overturning the status quo is high. The FTC received more than 20,000 submissions during its consultation, with big companies, trade groups, academics and affected workers all weighing in.
Pamela Abbate Dattilo, a lawyer in Minneapolis, said non-compete restrictions were an “issue that really affects the middle class more than anybody”, noting how these contracts had proliferated in sales and industries such as healthcare. “These men and women in sales who are making $50,000 to $100,000 a year are stuck at whatever company they’re at because they can’t go anywhere else.”
Lower wage employees can be particularly vulnerable to the restrictions, often because they do not have a clear sense of what the contracts mean or how they could be enforced . “Sometimes they don’t even know they have one until they try to leave,” said Ryan Nunn, the principal drafter of the Treasury department report on non-competes. “ Few workers report negotiating their non-competes, and often employers only present [the restrictions] after the new hire has accepted the job.”
Corporate executives are typically better informed and have easier access to legal representation, but can still face lengthy terms out of the workforce.
“Data has kept showing that [non-competes] are harmful to workers and firms,” said Evan Starr, a professor at the University of Maryland who studies the labour market. “The needle has moved towards really questioning non-compete agreements compared to less restrictive tools”.
John Terzaken, global co-chair of the antitrust and trade regulation practice at US law firm Simpson Thacher & Bartlett, said many companies were moving away from strict non-competes partly because the political environment has swung so strongly against the use of such contractual terms.
“Both sides of the aisle are really talking about the need for people to be able to advocate for themselves for higher wages and the like,” Terzaken said.
If employers decide to forgo non-competes, they still have other options when it comes to controlling staff. Terzaken said the focus had shifted to non-solicit clauses, which prevent staff from taking colleagues or clients when they leave an employer. Meanwhile, confidentiality agreements, which prevent employees from sharing private information, can be used to safeguard inside information.
But even if the FTC ban is passed next week, the agency is likely to face legal challenges, according to Starr. The US Chamber of Commerce, a trade group that represents business interests and has criticised the proposal, has said the FTC does not have the authority to enact the rule. It argues that the contracts “can serve vital pro-competitive business and individual interests — such as protecting investments in research and development, promoting workforce training and reducing free-riding”.
A previous attempt by New York state lawmakers to ban non-competes was vetoed by Democratic Governor Kathy Hochul in December, after several Wall Street firms objected to the rule.
Dozens of US states already have some limitations on non-competes but only four states have banned them altogether. California, which first made the contracts unenforceable in the late 1800s, is known for having the most sweeping protections. In January this year, the state went further, with new legislation that shields individuals from legal retribution if they break their agreements. Workers can seek cover in California, even if they lived elsewhere when signing the contract.
But state bans have not stopped some employers from including restrictions in contracts in the hope of deterring staff from looking for a job elsewhere, even though the terms would not hold up in court. Some experts worry that if Donald Trump wins the US presidential election, the issue will be put on the back burner.
Elsewhere, condemnation is building. Australian politician Andrew Leigh gave a scathing speech this month on the detriments of non-compete clauses. He mentioned cases including a choreographer and a disability support worker who signed such contracts. “Once upon a time, only the best‑paid corporate executives were required to spend a period of ‘gardening leave’ between jobs,” he said. “Now, gardeners are being forced to take gardening leave.”