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WSJ Your Money Briefing
Are Noncompete Clauses On the Way Out?
00:09:34
Many workers are asked to sign noncompete agreements that make it harder for them to go to work for a competitor. But noncompetes are coming under greater scrutiny from state and federal regulators. Workplace reporter Lauren Weber joins host J.R. Whalen to discuss whether these agreements' time is numbered.
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J.R. Whalen
Here's your money briefing for Thursday, July 22nd. I'm J.R. whalen for the Wall Street Journal. You might have heard of non compete clauses. Maybe you've even had to sign one for your job. For ages, companies have used non competes to keep workers from heading off to
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Lauren Weber
work for competitors, partly as a labor retention strategy. You know, they, especially at a, you know, perhaps a time like this or when the labor market is very tight, they don't want to lose workers.
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J.R. Whalen
The days of non compete clauses may be numbered. Coming up, our workplace reporter Lauren Weber will explain how states and the federal government are taking steps to weaken non competes or take them off the books altogether. That's after the break.
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J.R. Whalen
Workers quit jobs and move on to the next step in their career all the time. But when it comes to the possibility of taking a job with a competitor, that's when things get tricky. Companies often include non compete stipulations and employee agreements as a way of restricting where they can go after leaving their job. Now these agreements are drawing attention from regulators. Lauren Weber covers workplace issues for the WSJ. She wrote about non competes and what their future looks like. Lauren, thanks for coming on the show.
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Lauren Weber
Thanks for having me.
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J.R. Whalen
So Lauren, why do employers sometimes use non competes and how common are they?
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Lauren Weber
Originally, non compete agreements were used mainly to protect real trade secrets. So they were applied to the contracts of, say, top executives or high performing salespeople or technical scientists who had real proprietary information like formulas. But over time, they've become much more common, partly I think because of the Internet. This is what some of my sources told me. It became really easy for business owners and lawyers to just find a template online, cut and paste it into employment contracts and apply it to all of their workers. So according to one survey that was completed recently, 32% of companies use non compete agreements in the employment contracts for all of their employees. That's from entry level workers and the lowest paid workers all the way up to their highest executives. And I just want to add to that, not only, you know, like I said, entry level workers, but even very low paid people have become caught up in these non compete agreements like janitors or baristas or school teachers, security guards. So for people who are earning relatively little and in large part don't have access to confidential information, they're still being caught up in these.
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J.R. Whalen
So what does a typical non compete clause in an employee's agreement with a company call for and what do they actually say?
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Lauren Weber
Generally non compete clauses will say something like you can't go to work for a competitor, a direct rival in the same industry, usually for a certain length of time. It might be six months, it might be two years, sometimes it's even longer. Sometimes they'll also include a geographic radius. So it might be you can't go to work for another company in the same industry within a radius of 50 miles. Sometimes they're actually applied globally. So there's a lot of discretion that companies have to set the terms for these.
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J.R. Whalen
Now non competes have been criticized for a number of reasons. Let's talk about some of them. You mentioned that employees handling sensitive company data might have to sign one, but that even a lot of other kinds of workers do too, like blue collar workers.
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Lauren Weber
It's true. Many workers, you know, they show up to work on the first day and they're asked to sit in a room and sign a bunch of HR forms. This is often one of those forms they sign. Some people don't even really read the full text of it. But you know, companies have tried to enforce a lot of these non competes against blue collar workers, workers, people making hourly wages, often not making very much, partly as a labor retention strategy. You know, they, especially at a, you know, perhaps a time like this or when the labor market is very tight, they don't want to lose workers. So one way to try to keep people working for you and not going across the street to your rival is to ask them to sign one of the agreements and then send them a threatening letter if they quit the job. And you hear that they've moved on to another company in the same industry.
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J.R. Whalen
So companies cast a wide net with these agreements. Do the constraints differ across different levels of employees?
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Lauren Weber
Sure. Another difference between blue collar or hourly wage workers and then white collar or very professional workers who sign these contracts is, you know, executives or salespeople, scientists, they might have a lawyer who's looking over their contracts before they Sign them so they have an opportunity to negotiate. Another difference is that for those kinds of employees, sometimes they get access to something called garden leave. What it means basically is if your non compete says that you can't work in the industry for say two years or a year, your former employer might agree to pay you all or part of your salary for that time because they recognize they're taking you out of the labor market and not giving you an opportunity to earn an income during that time. But blue collar workers or lower wage workers generally don't have that written into their contract. Many times they don't have access to an employer to help them negotiate or even sort of understand what the limits of these terms are. And you know, usually, usually when you take a job, you're not thinking, what's going to happen to me when I quit this job? Sometimes you're even just very grateful to have that job. And for all you know, you're going to be there for years. So it's just, it's not top of mind for people until they get hit with a threatening letter or a cease and desist letter and are basically told, you know, you have to sit out of the labor market for some amount of time.
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J.R. Whalen
Do these agreements have any intended benefits for employees?
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Lauren Weber
That's a good question. Nobody I spoke to, including attorneys who help companies enforce these agreements, agreements really told me what the benefits are for workers. It's really, these agreements were written mainly to help companies. Again, the original purpose was to protect trade secrets. If you are a scientist working for Coca Cola, you know, Coca Cola has a very strong interest in protecting the secret formula for Coke. You know, same thing for a lot of scientific developments or advances. But again, the sort of indiscriminate use of these agreements has meant that companies are arguing that anything can be confidential information or proprietary information, whether it's a customer list or how you were trained for your job. I interviewed a security guard who was making about $11 an hour and he was threatened with a lawsuit. He actually was eventually sued by his former employer when he quit and tried to take another job as a security guard. And when I asked the former employer's lawyer, you know, what confidential information did this person have access to? He said, well, we invested a lot in training. And through the training he learned our training methods, he learned our proprietary security guard systems and technologies and things like that along with customer information. But it's very subjective what is proprietary information or not? And at the moment we kind of leave it up to courts to hammer that out. But A lot of workers don't have the resources or the knowledge to hire a lawyer to fight this in court.
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J.R. Whalen
Okay, so let's talk about the pushback against non compete clauses. Some states already limit non competes. What's the current status around the country?
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Lauren Weber
Yeah, some states have limits in place already. It might be something relating to, let's see, Washington state not long ago said that you can't impose a non compete agreement on anybody earning less than $100,000 a year. In a few states, including California, which is an important example, they basically have said the legislature there has basically said non compete agreements are not enforceable. So generally speaking, companies know better than to even try to do a non compete in California. And many people say that's partly why Silicon Valley developed in California was because talent was able to move around. That meant ideas were able to move around. There was no limit on somebody who was say trained by a big technology company leaving and starting their own startup with some great idea they had. So there are a lot of arguments that non competes hold back innovation, but California is kind of the exception. Most states basically have some limitations, but leave it up to courts to make a lot of these decisions.
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J.R. Whalen
And now there are efforts to rein them in at the federal level. Most notably, President Biden targeted them in a recent executive order. What are the expectations for how new federal rules might play out?
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Lauren Weber
Yeah, President Biden wants to rein these in and that's been non competes have been a target for a long time of many worker advocates. And you know, he's basically saying this is part of a pro competition order where he wants to improve competition for businesses, but also for workers and give workers the ability to move around freely, which also means they have more ability to raise their wages because often people will get a bigger bump in their salary or income when they switch jobs. So he's basically asked the Federal Trade Commission to take a look at non compete rules and set some limits on them. He also said they could consider an outright ban. But all the people I spoke to, lawyers, legal scholars, they don't expect the agency to put an outright ban on these, but they do expect there to be some limits, whether perhaps by income or the duration of the non compete or perhaps the geographic radius.
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J.R. Whalen
Okay, that's WSJ workplace reporter Lauren Weber. Lauren, thanks for coming on the show.
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Lauren Weber
Thanks for having me.
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J.R. Whalen
And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.
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Deal replaces fragmented Payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries operate like a local everywhere. Visit d e l.com WSJ.