It’s easy to see why, when a firm trains a new employee, it hopes the employee won’t use their new knowledge to help a competitor. In much of the country, employers are able to enforce that hope through noncompetition agreements (NCAs), more commonly known as “noncompetes.”
Such noncompetes are a type of post-employment legal covenant that restricts employees from working for a competitor or starting a competing business for a certain period of time or within a specified geographic boundary, or both. Use of these agreements rose steadily through the early aughts; today, they bind roughly 28 million American workers. The agreements affect everyone from hourly employees to C-suite executives.
Employers contend that NCAs secure legitimate and reasonable business interests, ensuring former employees cannot easily share confidential information that is key to business success. According to this argument, the protection afforded by these agreements incentivizes companies to invest in capital-intensive business activities such as worker training, and the development of specialized technologies—investments that firms won’t make if they think their assets (trained employees, intellectual property) can easily defect to competitors.
But while NCAs may give firms some short-term benefits, they are terrible for workers. By restricting workers’ career options so severely, these agreements allow firms to easily retain their employees at low wages. The lure of this anticompetitive advantage has led to the flagrant and unethical overuse of NCAs throughout the business community, to the detriment of workers across the nation. And as it turns out, NCAs also do long-term harm to employers, by making markets less dynamic.
To restore competition and workers’ rights, it is time for a national ban on NCAs. Fortunately, momentum is growing for action.
A Growing Movement to Curb NCAs
NCAs, by one name or another, have existed since the Middle Ages. In the United States, they can be traced back to at least 1811. Currently, NCAs are regulated at the state level. There is tremendous variability in the enforceability of NCAs depending on the state. Until about two decades ago, most states enforced NCAs by default (meaning the issue was not addressed in the state’s statutory law). If a case was brought to court, it was decided using the “rule of reason,” which is intended to weigh the harm inflicted on a worker against the validity of the protection provided to a firm. For numerous reasons, this approach yields clear and massive advantages to firms at high cost to workers.
The three states with long-standing blanket bans—where NCAs are completely unenforceable—are California, North Dakota, and Oklahoma. All three cribbed their language from New York State’s Field Code in the nineteenth century, and adopted the copy as part of their state legislation. (Despite its origin, the code was never enacted in New York, although the state legislature unexpectedly passed its own blanket ban in July 2023, which is anticipated to be signed into law this summer by the governor.)
Other states have laws that allow only partial enforceability of NCAs. During the first decade and a half of the twenty-first century, these states were spurred to action by increasingly egregious corporate overuse of NCAs—culminating in a torrent of national headlines chronicling employer abuses and a growing body of peer-reviewed research documenting the adverse labor market impacts. Oregon kicked off the regulatory charge in 2008 with a partial ban on NCAs. As of today, twenty-four states and counting have enacted legislation that limits NCAs. These laws range from exempting health care workers and low-wage employees from NCAs, to requiring a specified period of notice of the NCA requirement so that prospective workers have bargaining power during the employment negotiation period.
In the remainder of states, NCAs are still fully enforceable. But there are encouraging signs that could soon change.
Federal legislators stepped into the ring in 2015, introducing the first in a series of bills attempting to reign in NCA overuse; so far, all these bills have been defeated. Both the administrations of Barack Obama and Joe Biden have also taken an active interest in the matter, with the former issuing a suite of reports culminating in a formal call, in 2016, for states to pass best-practice regulatory measures designed to prevent abusive conduct (though the call fell short of recommending a total ban).
Prompted by Congress’s failure to pass any regulatory measures, the Federal Trade Commission (FTC) proposed a nationwide ban in January 2023. If passed, the rule will make it illegal for employers to use NCAs, with the exception of certain limited circumstances, such as the sale of a business or the dissolution of a partnership.
While the outcome of the FTC’s proposed rule is highly uncertain (the U.S. Chamber of Commerce has already pledged to sue if the FTC approves it), there is no question that it is past time to curb the use of this brazenly anticompetitive legal instrument and implement a uniform, nationwide federal ban on the use of NCAs. In fact, a nationwide ban would not only support workers, it would also benefit both employers and our economy as well.
A growing body of research in economics shows that NCAs harm workers by suppressing wages, reducing mobility, and lowering job satisfaction.
How Noncompete Agreements Hurt Workers
According to research, approximately 18 percent of the American labor force is currently operating under an NCA, and 38 percent has been subject to one at some point during their career (this is a fairly conservative estimate: some studies clock these rates close to twice as high). NCAs are most prevalent in high-skill, high-paying jobs, particularly for employees with access to valuable information working at for-profit companies (for example, approximately 64 percent of executives in publicly traded companies work under NCAs). However, NCAs are also common in industries without any legitimate claim to trade secrets or confidential information, such as health care, as well as low-wage jobs (where approximately 13.3 percent of workers earning less than $40,000 per year are bound by an NCA).
A growing body of research in economics has used the natural experiments provided by the passage of diverse state NCA bans to measure the impact of NCAs on firms, workers, and the broader economy. While there is some variation in the findings, almost all peer-reviewed studies have demonstrated that NCAs harm workers by measurably suppressing wages, reducing mobility, and lowering job satisfaction.
Research has also shown that the disadvantages of NCAs are not equally distributed throughout the workforce. Negative impacts are highest for low-income workers, people of color, and women. Studies have demonstrated that high enforceability reduces wages for women and non-white workers by twice as much as white men. As might be expected, while NCAs do have adverse impacts on members of the C-suite, the drawbacks are considerably less damaging than they are for nonexecutive employees.
There are two critical moments at which NCAs do the most harm to employees.
Harm 1: Contracting NCAs
One of the driving factors behind the negative outcomes for employees is the contracting process. Prevailing economic theory around NCAs assumes each party has total voluntary “freedom to contract.” This means that, in principle, workers have the opportunity and knowledge required to successfully negotiate the terms of their NCAs, and request considerations such as increased wages or company-sponsored training to ensure they are adequately compensated for the restrictions imposed by the covenant.
In practice, however, research demonstrates that the contracting process puts workers at a significant disadvantage, both because employers use unethical approaches to introducing NCAs and because most workers lack the awareness and skills to negotiate successfully on their own behalf. This disparity is heightened by the fact that NCA negotiations usually pit a worker with very little knowledge of legal agreements against a trained contracting specialist or general counsel with significant expertise in navigating the process.
Introduction of NCAs to workers is one area where firms exercise their advantage most egregiously and unethically. One of the most comprehensive studies conducted to date found that almost half of NCAs were delivered on or after an employee’s first day of work (in other words, when they have very little option but to sign). An additional 22 percent of respondents reported receiving NCAs after accepting a job offer (and therefore likely after giving notice to their current employer or turning down other offers). Less than one third of respondents reported receiving NCAs in tandem with their job offer.
Late notice is highly correlated with poor employee outcomes because it undermines bargaining position, leaving workers powerless to negotiate the terms of their new employment. Regardless of the notification period, however, only 10 percent of employees report attempting to negotiate NCAs (although workers provided with advanced notice are more likely to negotiate than those provided with late notice). This relatively low percentage is at least partially explained by the fact that 41 percent of workers report assuming that NCAs are nonnegotiable.
Harm 2: Enforcing NCAs
Proponents of NCAs point to research that has linked states with high enforceability of NCAs with a 14 percent increase in company-sponsored training, which they say demonstrates that employees are receiving additional consideration even if they did not negotiate for it. However, researchers have found that wages decreased by an average of 4 percent in states where NCAs became enforceable, which shows that resulting productivity gains due to firm-sponsored training are captured by employers and do not translate into a wage premium for NCA signatories (which also explains why companies are so willing to foot the bill for upskilling). While, in theory, company-sponsored training would benefit the employee if they were able to move to a competitor, in most cases the NCA makes such a move extremely difficult, by either requiring the employee to leave the industry for long enough that the training is rendered obsolete (two years is average) or by forcing relocation to a different state in order to stay within the industry.
It is hardly surprising that high enforceability of NCAs is associated with depressed wages and decreased labor market mobility. NCAs deliberately restrict the labor market for a worker’s most relevant and attractive job opportunities, eliminating the incentive for firms to pay competitive wages. As a significant portion of wage gains are realized through employer changes or the threat of an employer change (in other words, the ability to leverage an outside job offer to secure a raise at a current employer), limiting an individual’s freedom to move between employers throttles a critical pathway to professional advancement.
Limiting an individual’s freedom to move between employers throttles a critical pathway to professional advancement.
An Uneven Contracting Playing Field
Revealingly, firms use NCAs at roughly the same incidence in both states that enforce them and states that do not (this is largely true even for single-state employers that cannot claim to be using boilerplate language across multiple states to reduce legal costs). This fact demonstrates that firms fully appreciate and indeed rely on prospective employees to lack the legal knowledge and savvy to protect themselves against NCA overreach.
Given the rigged nature of the contracting process, it is hardly surprising that these agreements tilt the scales so heavily in favor of firms at the expense of workers. Not only is the contracting process strategically managed to erode worker bargaining power, but agreements are frequently expansive in scope, covering a panoramic range of tasks that have nothing to do with proprietary assets. For example, Amazon included the following provision in its employment contracts for seasonal warehouse workers until media scrutiny publicly shamed the company into removing it:
During employment and for 18 months after the separation date, employee will not . . . 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.
Even when NCAs are confined to the intended legal scope (protecting confidential assets), they still enable predatory business practices. Because NCAs do not distinguish between knowledge gained during the period of employment and knowledge gained prior to the period of employment, they conveniently allow a firm to declare property rights over experience and skills the organization has no claim to (for example, knowledge acquired during college or with a previous employer). As one employee interviewed for a study explained: “I have a PhD in the field. I walked in the door with an enormous amount of experience, and while I worked there for a year and a half they added maybe, what, 2 percent to that? And now they want to prevent me from…using any of what I know?”
The Impacts of NCAs Spill over to All Workers
While only about one-fifth of the workforce is operating under an NCA, the negative impacts are not limited to the individuals bound by them. Researchers have found that use of NCAs depresses wages for non-NCA workers in neighboring markets by reducing overall mobility, thinning labor markets, and increasing recruitment costs. Rough calculations from a 2021 study concluded that “rendering NCAs unenforceable nationwide would increase average earnings among all workers by 3.3 percent to 13.9 percent.”
Ubiquitous overuse of NCAs for workers without access to confidential business information, such as warehouse workers and nurses, is a key driver of this spillover effect into the general labor market. As the late Alan Krueger, who chaired Obama’s Council of Economic Advisers, once pointed out, the number of American workers bound by NCAs greatly exceeds “any plausible estimate of the share of workers with access to trade secrets that could justify noncompete agreements.”
The measurable overuse of NCAs, combined with widespread rigged contracting practices, shows that employers primarily use NCAs to depress labor market competition, not protect legitimate business assets. Furthermore, the very idea that NCAs protect legitimate business assets is dubious: in an economy increasingly driven by knowledge, the line between a company’s proprietary intellectual assets and the experience and skills of the workers who developed those assets is becoming murkier by the day. Research indicates that technological advancement is likely to further blur this line.
NCAs are inherently ethically questionable. And we have broad, strong, and clear data that demonstrate the massive scale at which corporations abuse NCAs, and how the agreements negatively affect workers. Thus, it is clear that only a uniform federal ban on NCAs can protect workers against NCAs’ unfair limits on their compensation and their ability to move freely through the labor market.
Noncompetes Hurt Companies, Too
Admittedly, the impact of NCAs—while overwhelmingly harmful for employees, especially low-wage employees—is more complex from the perspective of the employer. Indeed, firms engage NCAs precisely because there are real and tangible benefits from doing so. A host of studies offer evidence that NCAs incentivize key drivers of business development, growth, and sustainability, and that bans on NCAs can adversely impact indicators such as investment in R&D, executive tenure, and worker training, among other things.
The overuse of NCAs shows that employers primarily use them to depress labor market competition, not protect legitimate business assets.
For example, NCAs protect against the cost of firm-sponsored on-the-job training, which is often a critical investment that employers must make before a new employee can contribute to business impact. Many small businesses operate on razor-thin margins and are not able to survive the defection of employees, particularly if those employees then take the training provided and use it at a competitor business. NCAs are also used to protect employer assets such as intellectual property (such as trade secrets) and client lists. While other, more targeted legal mechanisms exist to protect these investments, violations of these alternative mechanisms can be hard to detect, prove, or remedy.
And yet, to examine the impact of NCAs on each of these indicators in isolation is to miss the forest for the trees. The true measure of consequence when assessing NCAs is not their impact on discrete business dynamics like investment in R&D, but their impact on high-level measures of success: namely, a firm’s overall productivity and profitability. At 30,000 feet, the noise of the data fades away and key trends emerge, revealing that unrestricted worker mobility and labor market competition are the foundations of long-run and large-scale business success.
Job Matching and “Brain Drain”
The success of industry in regions with bans on NCAs proves that companies can thrive—and indeed flourish—without the use of these restrictive covenants. In fact, research shows that firms often perform better overall in NCA-free markets, as NCAs have been strongly associated with several negative business impacts. One well-studied phenomenon that occurs in NCA markets is lower productivity due to poor job matching, as workers are trapped in roles in which they are unhappy, ill-suited, or both.
A second key negative impact is brain drain within the regional talent pool. A bizarre event in Michigan gave researchers a rare opportunity to measure the impact of NCAs on the state’s stock of talent when, as part of a 1985 antitrust reform, the state legislature reversed its policy on NCAs (apparently unintentionally) from nonenforcement to enforcement. By analyzing patent data gathered between 1975 and 2005, researchers tied enforcement of NCAs to a measurable brain drain event within the local talent pool. This exodus was spearheaded by specialists who fled for more competitive labor markets (such as those in non-enforcing states) where they did not have to cede the entire body of their acquired expertise to a new employer in exchange for a job. The effect was magnified for the region’s most prolific patentees, showing that the policy reversal cost Michigan (and its businesses) some of its brightest and most productive workers.
The Benefits of Clustering
Although most firms stand resolutely opposed to supporting the creation or growth of competitors, multiple studies have demonstrated that companies located in industry clusters (in other words, in a dense network of competitive firms) enjoy higher productivity and profitability than those in less competitive environments. This is due to the benefits of agglomeration economies, including a deep and specialized talent pool, knowledge spillover, and proximity to suppliers and business services attracted by the density of customers.
The regional economic benefits of clustering have led to significant research on the origins of clusters and policy mechanisms for spurring their development. By comparing a variety of domestic markets, researchers have been able to identify key drivers in the formation of successful clusters, one of which is the absence of NCAs.
Clustering is highly dependent on the “spinout” process, whereby employees from an existing firm leave to start a new business. While these new ventures can directly compete with the original firm, studies show that many workers leave to focus on technology applications eschewed by their former employers, and therefore many spinouts are not direct competitors. NCAs throttle both the original spinout process, by making it difficult for would-be founders to launch a new venture, and the talent recruitment process, by restricting the labor market’s best-matched workers.
Evidence shows that NCAs, by raising the barrier to entry, often thwart the cluster formation process, denying promising economies the chance to become an industry hub. Comparisons between the country’s most historically successful industry clusters and competing regions that could have become clusters—but failed to transform—illustrate this effect. An in-depth study performed by Steven Klepper in his paper “The Origin and Growth of Industry Clusters” examines this process, charting the development of the semiconductor industry in San Jose, California against Dallas, Texas, as well as the automobile industry in Detroit, Michigan against Indiana and Pennsylvania.
The Dallas-based company Texas Instruments (TI) pioneered the silicon transistor and, initially, “was continually at the forefront of the industry with a larger market share” than its San Jose-based competitor Fairchild Semiconductor. Despite these advantages, the silicon industry took root in San Jose (in a region that would come to be called Silicon Valley) on the strength of the spinout process. Within twenty-five years, at least twenty-nine semiconductor startups had one or more founders who had previously worked for Fairchild. A key difference between the two regions was the enforceability of NCAs in Texas, which prevented enterprising and entrepreneurial employees at TI from bringing their ideas to market as part of new ventures. Klepper draws similar parallels between Michigan and the two other states (Indiana and Pennsylvania) that had the potential to transform into automobile clusters but never achieved critical industry mass (most likely due to their use of NCAs).
Taking the Long View
As the discussion above makes clear, NCAs impact a large number of individual business indicators, from investment in worker training to the rate of spinout formation. However, to accurately assess the role NCAs play in the complex process of spurring and sustaining industrial activity, their impact on the overall success of firms must be evaluated, not just their impact on discrete dynamics.
Ultimately, the data reveal that NCAs support short-term firm interests (such as protecting intellectual capital, retaining employees, suppressing compensation, and lowering the entry rate of competing ventures), but undermine long-term performance and profitability. This is because firms actually benefit from the very market conditions they seek to prevent: high-velocity labor markets and large-scale knowledge diffusion.
Firms actually benefit from the very market conditions they seek to prevent: high-velocity labor markets and large-scale knowledge diffusion.
The lure of fluid labor markets and competitive compensation attracts a deep and qualified talent pool of employees free to find a position that best leverages their interests, skill set, and knowledge (enhancing their potential to be productive). Additionally, weakened intellectual property protection also provides advantages to a firm in that knowledge will be diffused both out of and into the organization.
Given that the benefits stemming from a strong, dynamic labor force and knowledge spillover outweigh the drawbacks of eroded intellectual property protections, it stands to reason that a federal ban will promote firm interests, thereby driving prosperity, technological advancement, and economic growth.
Break the Shackles
Any argument in favor of NCAs is crushed under the weight of evidence proving that these restrictive covenants are superfluous to firm success (companies can and do flourish in their absence) and place an outsized and unfair burden on workers, forcing individuals to surrender the knowledge, skills, and experience they have acquired through an investment of personal capital, time, and effort.
Further, these agreements diametrically oppose the free market principles—voluntary exchange and open competition—under which our economy was designed to operate. Contrary to the idea that firms have some inalienable right to their workers simply because they’ve invested resources in acquiring and training them, employers should be competing to acquire and retain talent. This competition—which forces companies to use perks that incentivize retention rather than shackles that prevent defection—is what underlies and drives balanced labor market power. NCAs tilt the scales so heavily in favor of firms as to create a quasi-monopsonistic labor market for the workers bound by them.
A national ban will not only protect workers from exploitative and anticompetitive employment practices. It will also create space for the rise of dynamic and fluid entrepreneurial environments that drive long-run success for our nation’s workers, its employers, and the economy.