Another Congress, another federal noncompete bill.
Yesterday (February 25), four Senators — Chris Murphy (D-Conn.), Todd Young (R-Ind.), Kevin Cramer (R-N.D.) and Tim Kaine (D-Va.) — introduced another version of the Workforce Mobility Act (S.843). Simultaneously, Congressman Scott Peters (D-CA-52) filed an analogue bill (H.R.1367) in the House. (For a brief history of the federal legislative efforts to ban or restrict noncompetes, see below; for a more detailed history, see Federal Noncompete Initiatives: When you can’t convince the states, ask the feds.)
What will the bill do and why?
Although the text is not yet available, according to Senator Murphy’s website, The Workforce Mobility Act would:
- “Narrow the use of noncompete agreements to include only necessary instances of a dissolution of a partnership or the sale of a business”;
- “Place the enforcement responsibility on the Federal Trade Commission and the Department of Labor, as well as a private right of action”;
- “Require employers to make their employees aware of the limitation on non-competes, as studies have found that non-competes are often used even when they are illegal or unenforceable. The Department of Labor would also be given the authority to make the public aware of the limitation”; and
- “Require the Federal Trade Commission and the Department of Labor to submit a report to Congress on any enforcement actions taken.”
In essence, this is a complete ban on all employee noncompetes.
The purported justifications for the ban (with my responses in italic) are as follows:
- “An alarming 40 percent of American workers have been constrained by a non-compete agreement at some point in their careers.”
- So? It’s only alarming if noncompetes are inherently a bad thing. But, as some of the research indicates — particularly when noncompetes are disclosed in advance — there are positive outcomes for workers, companies, and society.
- “Non-competes often lack transparency and result in lower wages.”
- True. But, these issues can be addressed by requiring advance notice — not a ban. Indeed, studies show that employees “presented with a noncompete before accepting the associated job offer earn 9.7% higher wages . . . than those not bound by noncompetes.” (Emphasis added.)
- “Research indicates that workers trapped by non-competes are less mobile, which results in firms having difficulty hiring workers with the right set of skills. In states where non-competes are enforced, young firms are more likely to die in their first three years compared to states where they are not enforced.”
- Putting aside the use of loaded words like “trapped,” which do not accurately portray the impact of noncompetes, this point ignores that studies also show that “states that permit stronger enforcement of noncompete agreements tend to have fewer – but better (higher-quality ideas and more likely to survive) – startups.” (Emphasis added.)
- “I’m tired of seeing companies hide behind these agreements as a way to depress wages and prevent competition.”
- Putting aside the implication that all companies that use noncompetes have sinister motives, the studies that suggest that noncompetes depress wages are largely about low-wage workers. Other studies show that other groups fare better (for example, increased wages, more job satisfaction, more training) when noncompetes are used — especially when they are used properly. Further, not a single state in the country permits the use of noncompetes simply to prevent competition.
- People want to be able to change jobs and earn more money.
- True. Noncompetes do not inherently prevent either of those.
- “The Workforce Mobility Act provides that freedom while also supporting new business opportunities and overall economic growth.”
- It is entirely unclear how this would be the case. Just from the points noted above, the impacts — assuming the research is accurate — would, at best, be mixed. Worse, they could have devastating impact. For more on this issue, see my testimony to the United States Senate Committee on Small Business & Entrepreneurship (November 28, 2019) and the joint submission by me, 21 other lawyers, and my paralegal (Erika Hahn) to the FTC (March 11, 2020).
- “Non-compete agreements stifle wage growth, career advancement, innovation, and business creation.”
- Not accurate. See above.
- “The reforms in the Workforce Mobility Act will empower our workers and entrepreneurs so they can freely apply their talents where their skills are in greatest demand, especially given the dramatic shifts in the job market over the past year.”
- Putting aside the issues discussed above, companies will resort to other ways to protect their legitimate business interests — including ways that are far more costly and time-consuming for all involved. See, for example, California Trade Secrets Litigation Supplants Noncompete Litigation.
- “Non-compete agreements slow the pace of economic innovation and productivity.”
- This is an oft-stated position that is taken as gospel, but not actually proven. See Correlation Does Not Imply Causation: The False Comparison of Silicon Valley and Boston’s Route 128.
- “These agreements restrict workers, disrupt labor markets, and hinder economic prosperity for workers across the country.”
- See above.
Is a complete ban of employee noncompetes a good idea?
As readers of this blog know — putting aside whether the federal government can or should regulate a traditional state contract issue (a topic on which I have very mixed feelings) — I think that sweeping legislation with potentially significant ramifications for people, companies, and the economy should be based on more than political expediency, soundbites, and preliminary, nuanced, inconclusive, and sometimes inconsistent studies. For more on that, see President Biden’s Proposed Ban of (Most) Noncompetes: Protection Strategies and Steps to Take Now.
And, as I noted there, though it may occasionally appear otherwise, I actually don’t think that noncompetes are warranted nearly as often as I see them used. But, I recognize that they are sometimes necessary. That’s because every day (quite literally), I see employees and new employers engage in conduct that underscores the need for noncompetes. Conversely, I also regularly see conduct by employees and employers that is beyond reproach. But, it’s often not clear which of these paradigms will apply when an employee leaves, and noncompetes should be available when circumstances require them.
That said, more narrow regulation — for example, most of those identified in President Obama’s Call to Action on noncompetes — could be appropriate to address the abuses of noncompetes that gave rise to this movement in the first place. Indeed, many states already have imposed those types of limitations, and others have them in the works.
Looking for a quick reminder of the prior federal noncompete bills?
The first federal legislative efforts to restrict noncompetes trace back to three bills filed in 2015.
The first (the “Mobility and Opportunity for Vulnerable Employees Act” or “MOVE Act“), filed by Senator Chris Murphy (D-CT) and co-sponsored by then-Senator Franken and Senators Elizabeth Warren (D-MA), Richard Blumenthal (D-CT), and Sheldon Whitehouse (D-RI), sought to prohibit the use of noncompetes for “low-wage employees.” The other two were the “Limiting the Ability to Demand Detrimental Employment Restrictions Act,” which was very similar to the MOVE Act, and the “Freedom for Workers to Seek Opportunity Act,” which sought to ban the use of noncompetes for grocery store workers (only). None of these bills passed.
A few years later, in April 2018, Senators Elizabeth Warren (D-MA), Chris Murphy (D-CT), and Ron Wyden (D-OR) introduced the Workforce Mobility Act of 2018(S. 2782) to impose a federal ban on the use of employee noncompetes. A companion bill was introduced in the House by Representatives Joseph Crowley (D-NY), Linda Sanchez (D-CA), Mark Pocan (D-WI), Keith Ellison (D-MN), Jerrold Nadler (D-NY), and David Cicilline (D-RI), who were later joined by Janice Schakowsky (D-IL), and Alan Lowenthal (D-CA). That legislative session ended without action on either bill.
In the last session, in January 2019, Florida Senator Marco Rubio introduced the “Freedom to Compete Act” to amend the Fair Labor Standards Act of 1938 (29 U.S.C. 201, et seq.) to ban noncompetes for most nonexempt workers. And, on October 17, 2019, Senator Chris Murphy (D-CT) and Senator Todd Young (R-IN) filed the Workforce Mobility Act to ban the use of virtually all employee noncompete agreements. Neither of these bills passed.
Of course, don’t forget that the issue has been before the Federal Trade Commission and that President Biden has identified noncompete reform as part of his platform.
Nothing yet. We’ll keep you posted.
Photo credit: Martin Falbisoner