Noncompete agreements reduce salaries, fuel relocations
- Noncompete agreements can suppress employees' earnings throughout their careers and drive many to seek work out of state, says Quartz, citing the results of a new study. According to a U.S. Treasury report, one-in-five U.S. jobs is restricted by a noncompete agreement.
- Study results show that in states where noncompete agreements are strongly enforced, salaries for workers under these contracts are reduced for up to eight years, even if they aren't changing jobs. Also, these workers are less likely to change jobs, which typically is a wage-increasing career move, and less than 10% negotiate the agreement's terms. Tech workers are more likely to be restricted by noncompetes than workers in other industries.
- Researchers in the study found that among 5.5 million new companies in 30 states, entrepreneurs bound by noncompetes were less likely to start a business in the same industry, which they say can hurt the economy.
Companies have myriad reasons for using noncompetes but, according to a report issued by the Obama administration, they're being overused, especially with respect to low-wage workers. The agreements are notoriously opaque; many don't realize they've signed one in their new hire paperwork. And employees are pushing back in litigation, with some success.
For most companies, noncompetes can be used successfully, but they must meet certain criteria. Employers generally have to be able show that violation of the agreement would cause them substantial harm for it to be enforced, for example. But employers must keep an eye on state law, as well. Noncompetes are already unenforceable in California, and other state and local governments are considering similar rules.