By restricting future competition for employees’ labor, employee non-competition clauses hurt marketplace efficiency just like you’d expect. Indeed, one of the key ingredients in Silicon Valley’s “secret sauce” is California’s long-standing categorical rejection of employee non-competes, compared to other states’ tolerance for such restrictions. Undoubtedly, society would benefit if we eliminated these distortions on marketplace competition for labor.
Fortunately, Congress is taking notice. In an effort to crack down on the overuse of employee non-compete restrictions, several Senators are sponsoring S. 1504, the “Mobility and Opportunity for Vulnerable Employees Act” (or MOVE Act).
The Act has two main provisions. First, the Act makes it illegal to impose non-compete restrictions on “low-wage” employees, generally defined as employees earning less than $15/hour (or minimum wage, if higher) or an annual salary of $31,200. These dollar thresholds escalate over time. Second, for all other employees working in interstate commerce, the law requires employers to disclose that they will require non-compete restrictions early in the job search process. The Act says such disclosure should be “at the beginning of the process for hiring such employee.” Violations are enforced by the Department of Labor.
These are good ideas, so I support the bill. However, the bill could be strengthened:
1) Expand the categorical ban to all employees. It makes no sense to permit low-wage employees to agree to non-compete provisions. Compared to other employees, low-wage employees are the least likely to have access to the employer’s proprietary information, to have strategic significance to the employer, to have any leverage negotiating their employment terms, or to receive a wage premium to compensate the employees for the reduction of future competition for their services. These are all good reasons to give them protection from such an abusive contractual term.
Still, non-compete provisions are bad news for all employees, not just low-wage employees. Non-compete provisions mean that an employee might end up unemployed rather than take another job with a verboten competitor–even if the employee was laid off or forced to resign. Indeed, we as taxpayers subsidize any such unemployment through government unemployment benefits. That’s a bad deal for all of us.