Use and Abuse of the Non-Compete: When Employers Utilize Non-Compete Clauses to Undercut Vulnerable Workers

The use of non-compete clauses in the United States is fairly widespread. Recent research suggests that 18 percent of all workers, or nearly 30 million people, are covered by non-compete agreements. These agreements are, at least in theory, primarily intended to protect trade secrets: they prevent employees from taking proprietary information to a firm’s competitor. For this reason, non-compete agreements are common in computing and engineering jobs. In recent years, however, employers have increasingly enforced non-compete clauses against a number of unlikely workers, including sandwich makers, temporary warehouse staff, hair stylists, and even summer camp counselors. Some employers have also required independent contractors to sign non-compete clauses – cutting deeply against the claim that independent contractors should be classified as such because of their autonomy.

Non-Compete Agreements and Low-Wage Workers

Various news sites have covered the increasing use – and abuse – of non-compete agreements. In 2014, the Huffington Post reported that Jimmy John’s required its low-wage sandwich makers and delivery drivers to sign restrictive non-compete clauses. The clauses prohibited employees from working at one of the sandwich chain’s “competitors” for a period of two years following their employment at Jimmy John’s, defining “competitor” as any business located within three miles of any Jimmy John’s location that derived more than 10% of its revenue from sandwiches. The Jimmy John’s revelation led to a proposed Senate bill that would ban non-compete agreements for low-wage workers, but perhaps unsurprisingly, the bill has virtually no chance of passing.

Last year, The Verge published an exposé on Amazon’s practice of requiring temporary warehouse workers to sign strict non-compete clauses (Amazon discontinued the practice after the story broke). The New York Times has also covered the rising use of non-compete agreements, noting that the types of workers covered by non-compete clauses range from the questionable to the absurd: entry-level social media marketing employees to nineteen-year-old summer camp counselors. Most recently, the Wall Street Journal exposed how Law360 attempted to enforce a non-compete agreement signed by one of its journalists. New York Attorney General Eric Schneiderman has reportedly launched an investigation to determine if Law360 violated New York labor laws.

While all of these employers have claimed that they had an interest in protecting proprietary information, these non-compete agreements seem “intended less to protect training investments or competitive secrets than to reduce the negotiating power of low-wage employees.” The government agrees. Last month, the U.S. Treasury Department released a report on the economic effects and policy implications of non-compete contracts. It concluded that non-compete agreements “impose large costs on workers,” including the reduction of worker bargaining power, which may in turn lead to lower wages.

Non-Compete Agreements and Independent Contractors

The use of non-compete agreements has also extended to independent contractors. Because California prohibits the enforcement of non-compete agreements, many gig economy companies are foreclosed from using them (although anecdotal evidence suggests that at least one – Uber – employs other tactics to achieve similar results). For companies operating outside of California and the small handful of other states that prohibit non-compete clauses, the situation is different.

A recent Slate article on the mistreatment of contract workers revealed that Comcast and other cable companies often require the contract cable installers to sign non-compete clauses. The application of these clauses to contractors can have devastating effects. When one contract worker, for example, refused to sign a 6-month non-compete clause, “he was let go, but an earlier non-compete he’d signed meant he couldn’t work elsewhere for 30 days.” He was forced to rely on savings intended to pay his taxes in order to cover his bills. As David Blanchard, a Michigan-based labor lawyer, explains, non-compete clauses “undermine the idea of an independent contractor as someone who is free to come and go and choose which jobs they take.”

Some companies recognize this contradiction and have reclassified their workers as employees as a way to prevent their workers from taking customers – in other words, as a way to utilize non-compete agreements. The implications of such a move are ambiguous: on the one hand, if non-compete agreements are declared void against independent contractors, it may incentivize more companies to classify their workers as employees. On the other hand, if companies classify their workers as employees in part so they can enforce non-compete agreements, it could lead to more situations like that at Jimmy John’s.

Efforts at Reform

While federal proposals to ban or limit non-compete agreements have stalled, some successful activity has taken place on the state level. California, Montana, Oklahoma, and North Dakota already prohibit enforcement, subject to narrow exceptions, of non-compete agreements. Several additional states have taken steps to curb their use. In March, legislatures in Idaho and Utah approved laws restricting the duration of non-compete clauses to 18 months and one year, respectively. In Massachusetts, repeated efforts to ban non-compete agreements entirely have failed, but a recent proposal to reduce their duration and make them unenforceable against low-income workers appears to have a better chance of passing. In Washington State, a bill introduced earlier this year would ban “unreasonable” non-compete agreements, defined as those applying to temporary or seasonal workers, employees laid off or terminated without “just cause,” and independent contractors. Although voting has been delayed until next year, the bill appears to have garnered strong support.

Protecting vulnerable workers will likely necessitate more comprehensive protections than these piecemeal efforts at reform, but they do represent a valuable first step. While there may be a place for non-compete agreements in certain industries, their use against lower-wage workers only exacerbates already-existing power imbalances. When an executive or highly skilled worker signs a non-compete clause, for example, “it is typically the product of a negotiation in which there is some symmetry.” When it comes to low-wage workers and independent contractors, such symmetry is likely lacking.