Amid this extraordinary mass exit and mobility, employers in certain industries are scrambling to retain workers and fill vacancies. Workers in low-wage service sectors such as fast food currently possess real power. Employers have offered higher wages and bonuses to keep their current workforce and to attract new workers. Between November 2020 and November 2021, average hourly wages increased 12.3 percent in the leisure and hospitality industry.
Yet some employers have resorted to less salutary methods to retain staff. They have ramped up enforcement of non-compete contract clauses to prevent workers from leaving for rivals offering higher wages and to send a message to their workforce to stay put. As many as 60 million Americans across income levels and occupations may be subject to a non-compete clause.
With broad and growing political opposition to, and new state-level legal restrictions on, non-compete clauses, employers have started using other contracts that function as non-compete clauses. Some use “liquidated damages” clauses that require employees to pay large amounts of money in the event they leave. Another increasingly common employment contract is the “training repayment agreement” that compels workers to repay large amounts of money for on-the-job training if they leave before a specified time. The trainings themselves are often a sham and merely a pretext for penalizing workers who leave. Both of these tactics can be even more pernicious than conventional non-competes because they restrict all departures, not only departures for “competitive” positions. They may even run afoul of the 13th Amendment’s prohibition on involuntary servitude.
For an employer, using a non-compete or another similar contract to retain workers is likely to be more attractive than raising wages or paying bonuses. Court action is often not necessary for non-competes to lock workers into place. Many workers bound by non-compete clauses mistakenly believe employers can and will sue them in court if they leave—even when state law does not allow it. Accordingly, these workers refrain from looking for new employment or reject job offers they receive.
Employers recognize that non-competes have this power. In California, where non-competes cannot be enforced against employees through legal action, one survey found that 45 percent of workplaces still use them with at least some of their workers. Non-competes are now deterring labor market mobility at a moment when higher wages and better treatment on the job are real possibilities for millions.
Reform may be imminent. President Joe Biden has recognized the scourge of non-competes and last summer encouraged the Federal Trade Commission (FTC) to limit employer use of these contract clauses.
In a sweeping July 2021 executive order entitled “Promoting Competition in the American Economy,” President Biden called on the FTC to consider “curtail[ing] the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility” through its rulemaking authority. (Full disclosure: in March 2019, the Open Markets Institute, where I work, led a labor and public interest coalition that petitioned the FTC to ban non-compete clauses for all workers.) Non-competes have drawn the president’s ire in the past. As a candidate for president in 2019, Biden tweeted, “We should get rid of non-compete clauses and no-poaching agreements that do nothing but suppress wages.”
The FTC should follow the president’s 2019 pledge and ban non-competes and related contracts for all workers. Although it has not initiated regulatory action or committed to enacting a new rule, the FTC may propose a regulation of non-competes this year, judging from a Statement of Regulatory Priorities published last month. A rule prohibiting non-compete clauses would be timely—the current labor market shows the value of effective worker mobility. A comprehensive FTC ban on non-competes would allow all workers, not only those at the top, to enjoy the fruits of employer competition for their services.
Sandeep Vaheesan is the legal director at the Open Markets Institute, an antimonopoly research and advocacy organization.
The views expressed in this article are the writer’s own.
