Noncompete agreements are unfair to workers

A version of this column originally appeared in Michigan Advance.

Earlier this month, the Federal Trade Commission proposed a rule prohibiting employers from requiring employees to abide by noncompete agreements as a condition of employment.

The practice of requiring employees to sign a noncompete agreement is not new, but was traditionally required of higher-paid employees to prevent them from taking clients, trade secrets and resources from one firm to another. Unfortunately, it has become more common for low-paying employers such as retail stores and restaurants to require these agreements as well. In New York, for example, some Jimmy Johns franchises had been prohibiting former employees from working for similar restaurants within a three-mile radius for two years after leaving employment.

The only reason for a business to impose noncompete agreements on lower-paid employees is to make it more difficult for them to find better work.

A report from the Economic Policy Institute cites a finding that 55% of Michigan employers require at least one employee to sign a noncompete agreement and 38% require all their employees to sign one. These percentages are among the highest of the larger states and underscore the pervasiveness of this practice.

In addition to being an obstacle to finding better work, noncompete agreements go against the idea that Americans can better their situations by seeking work with higher pay, better hours or a better work environment. Giving an employer power over where its employees can work even after they leave goes against the “free-market principles” that business groups promote.

In 2020, the Michigan League for Public Policy testified in support of a bill that would have prohibited the use of noncompete agreements for employees making wages at or below 138% of the poverty level (roughly $14.50 per hour at that time), although we believe the threshold should be significantly higher. In opposition, businesses argued that the bill “does not take into account any other factor than income, such as access to proprietary information, sensitive processes, technologies, trade secrets, competitive information or the like.”

The bill was not voted out of committee and received no further hearings, particularly as the urgency of responding to the pandemic pushed many non-emergency issues to the back burner. A similar bill was introduced during the 2021-22 session that had 36 co-sponsors, but did not receive a committee hearing at all.

Business groups objecting to the far-reaching aspects of the Biden administration proposal could meet worker advocates halfway and agree to a national wage threshold below which an employee cannot be required to sign a noncompete agreement. It appears that no such groups have put forth such a proposal.

One idea is to align the wage threshold for noncompete agreements to that for overtime exemptions. The current overtime threshold is $684 per week ($35,568 annually). While it can be argued that this threshold is too low for both overtime and noncompete agreements, it would be preferable to the lack of noncompete protections for low-paid workers now.

The FTC’s proposed rule would protect low-paid workers around the country. The commission estimates that each year its proposed rule would increase workers’ earnings by nearly $300 billion, save Americans up to $148 billion on health care costs, and double the number of companies founded by a former worker in the same industry. That would be good not only for workers, but for the economy as a whole.