WEBVTT - Why Are Noncompete Agreements So Common? 0:00:01.920 --> 0:00:06.800 Welcome to brain Stuff production of iHeart Radio. Pay brain 0:00:06.840 --> 0:00:10.959 Stuff Lauren bog Obam Here. If you're working for a 0:00:11.000 --> 0:00:14.040 company that you don't like and decide to go work 0:00:14.040 --> 0:00:17.880 for its competitor instead, will that first company come after 0:00:17.920 --> 0:00:21.560 you for switching jobs? That can depend on whether you 0:00:21.640 --> 0:00:26.119 signed a noncompete agreement. A noncompete agreement is a type 0:00:26.120 --> 0:00:29.280 of contract that prevents an employee from working for a 0:00:29.280 --> 0:00:34.160 competitor within months or even years after leaving a particular company. 0:00:34.640 --> 0:00:38.159 In other words, non compete clauses are designed to protect 0:00:38.240 --> 0:00:42.120 an employer against workers taking their talents and trade secrets 0:00:42.159 --> 0:00:46.640 to the competition. That might make sense for high paid 0:00:46.640 --> 0:00:51.040 corporate executives, TV anchors or tech workers whose sudden departure 0:00:51.159 --> 0:00:54.320 to the competition would pose a real threat. But the 0:00:54.400 --> 0:00:57.720 wild thing about non compete agreements is that American employers 0:00:57.760 --> 0:01:00.600 have asked all types of workers at all age levels, 0:01:00.600 --> 0:01:05.400 design them home health workers, sandwich shop employees, even dog walkers. 0:01:07.440 --> 0:01:11.400 According to data published in the Journal of Law and Economics, 0:01:11.440 --> 0:01:14.600 around one in five American workers are bound by a 0:01:14.640 --> 0:01:18.640 noncompete agreement. For the article this episode is based on 0:01:18.760 --> 0:01:21.600 How Stuff Works. Spoke with study co author Evans Starr, 0:01:21.760 --> 0:01:24.880 an assistant professor of Management and organization at the Robert H. 0:01:24.920 --> 0:01:28.480 Smith School of Business at the University of Maryland. He said, 0:01:28.920 --> 0:01:31.680 you'll find noncompete agreements in every corner of the US 0:01:31.760 --> 0:01:35.600 labor market. They're being signed by interns, minimum wage workers, 0:01:35.760 --> 0:01:39.240 even volunteers for nonprofits in states like California that won't 0:01:39.240 --> 0:01:45.319 even enforce noncompete agreements. According to STARS Research, nearly of 0:01:45.400 --> 0:01:48.400 the eleven thousand, five hundred and five U S workers 0:01:48.400 --> 0:01:51.600 that he surveyed have signed a noncompete agreement at some 0:01:51.640 --> 0:01:55.800 point in their careers, and eight are currently bound by one. 0:01:56.440 --> 0:01:59.920 That includes one third of workers earning forty dollars a 0:02:00.080 --> 0:02:04.200 year or less. Another study by the Economic Policy Institute 0:02:04.360 --> 0:02:07.760 found that tent of employers paying less than thirteen dollars 0:02:07.800 --> 0:02:12.320 an hour required their workers to sign noncompete agreements. Of 0:02:12.440 --> 0:02:14.600 the folks in the top earning tier of their study, 0:02:14.880 --> 0:02:18.919 those making fifty and above, thirty six point five percent 0:02:19.120 --> 0:02:26.120 had signed noncompetes. So do noncompete agreements serve a legitimate purpose? 0:02:27.280 --> 0:02:30.680 The classic argument in favor of noncompete agreements is that 0:02:30.720 --> 0:02:32.840 they take some of the risk out of hiring and 0:02:32.880 --> 0:02:37.359 training new employees. Companies invest time and resources in training 0:02:37.400 --> 0:02:41.360 their workers, and part of that training includes sharing inside information, 0:02:41.600 --> 0:02:44.760 maybe even trade secrets, about how the companies do business. 0:02:46.200 --> 0:02:49.200 Starr said, if the worker is allowed to walk across 0:02:49.280 --> 0:02:51.920 the street and join a competitor, then that puts the 0:02:51.919 --> 0:02:55.120 firm at a competitive disadvantage. The company had to create 0:02:55.160 --> 0:02:59.680 that information and spend lots of money developing it. Another 0:02:59.760 --> 0:03:03.320 argue in favor of noncompete clauses is that workers aren't 0:03:03.360 --> 0:03:06.720 technically forced to sign them. They can be negotiated as 0:03:06.760 --> 0:03:10.040 part of the overall employment contract. If a worker feels 0:03:10.040 --> 0:03:12.799 like they're giving up too much by signing an oncompete clause, 0:03:13.000 --> 0:03:16.359 they can ask for a higher salary or walk away. 0:03:16.880 --> 0:03:19.440 In reality, though, very few people are in a position 0:03:19.480 --> 0:03:22.359 to negotiate, or perhaps they don't consider it a hill 0:03:22.400 --> 0:03:26.239 worth dying on, and Starr said less than ten percent 0:03:26.280 --> 0:03:30.000 of workers negotiate over their noncompete agreement. More than five 0:03:30.040 --> 0:03:32.200 percent of the time, when a worker is presented with 0:03:32.200 --> 0:03:37.120 a noncompete agreement, they simply sign it. If you're one 0:03:37.160 --> 0:03:40.280 of the millions of Americans who have signed noncompete and 0:03:40.400 --> 0:03:43.000 you might assume that very few of these contracts are 0:03:43.000 --> 0:03:46.600 ever enforced, companies would only go after the big fish right. 0:03:48.040 --> 0:03:51.240 A Wall Street Journal analysis found that non compete lawsuits 0:03:51.320 --> 0:03:56.600 increased by six from two thousand to A star said, 0:03:56.920 --> 0:03:59.839 there are about a thousand non compete lawsuits a year, 0:04:00.080 --> 0:04:02.200 and you'll find all sorts of workers that you'd never 0:04:02.240 --> 0:04:06.560 expect to be in the legal record. Consider the home 0:04:06.600 --> 0:04:09.480 health aid who was sued by his Pittsburgh based agency 0:04:09.600 --> 0:04:12.560 when he tried to leave and work for a rival company. 0:04:12.840 --> 0:04:15.160 Or the famous case of the janitor who was sued 0:04:15.200 --> 0:04:18.400 by her billion dollar employer Kushman in Wakefield when she 0:04:18.480 --> 0:04:21.480 tried to work for arrival cleaning business. Of the company 0:04:21.560 --> 0:04:26.520 dropped the case after a public outcry. Relatively few noncompete 0:04:26.560 --> 0:04:29.560 lawsuits ever go to court, though the very existence of 0:04:29.560 --> 0:04:32.880 these agreements is usually enough to intimidate workers, whether you're 0:04:32.920 --> 0:04:35.599 a janitor or a manager, from leaving for a better 0:04:35.640 --> 0:04:39.400 paid job with the competition. They often use broad language, 0:04:39.520 --> 0:04:42.479 not just prohibiting employees from going to a competitor, but 0:04:42.560 --> 0:04:45.240 stipulating that the employee will have to pay the company's 0:04:45.320 --> 0:04:48.640 legal fees should the case go to court. Often, threatening 0:04:48.680 --> 0:04:51.800 letters from a company's lawyers stop employees before a case 0:04:51.839 --> 0:04:55.560 gets that far, but if it does go to court, 0:04:55.800 --> 0:04:59.279 judges generally stick to the janitor rule when determining the 0:04:59.360 --> 0:05:03.680 enforceability of a noncompete agreement. A contract is unenforceable if 0:05:03.680 --> 0:05:06.080 it's so broad that it prevents a worker from taking 0:05:06.160 --> 0:05:10.600 any job with a competitor, including a janitor. A Star 0:05:10.760 --> 0:05:13.360 argues that noncompete agreements are not only bad for the 0:05:13.400 --> 0:05:16.120 workers who signed them, but also for the entire US 0:05:16.240 --> 0:05:20.880 labor market, employers included. He said, Let's say that in 0:05:20.920 --> 0:05:23.960 a certain market, sector of the workers are bound by 0:05:24.040 --> 0:05:27.400 noncompete agreement. If you're a firm trying to fill a position, 0:05:27.600 --> 0:05:30.160 it's going to be really hard to hire an experienced 0:05:30.200 --> 0:05:35.120 worker because everybody is bound by noncompete agreements. The Star's 0:05:35.120 --> 0:05:38.240 research shows that noncompete agreements come up the labor market, 0:05:38.440 --> 0:05:41.880 driving down wages, slowing the hiring process, and making it 0:05:42.000 --> 0:05:45.160 less likely for workers not signing a noncompete to receive 0:05:45.200 --> 0:05:49.240 a job offer. As of right now, various types of 0:05:49.240 --> 0:05:54.280 noncompete agreements are enforceable in forty states. Only California, North Dakota, 0:05:54.360 --> 0:05:58.440 and Oklahoma have outlawed noncompetes for all workers. A handful 0:05:58.480 --> 0:06:01.800 of other states like Maryland have also banned noncompete agreements 0:06:01.839 --> 0:06:07.479 for low wage workers, but in early July, President Joe 0:06:07.480 --> 0:06:10.880 Biden signed an executive order calling on the Federal Trade Commission, 0:06:10.960 --> 0:06:14.039 or FTC, to ban or limit the use of noncompete 0:06:14.040 --> 0:06:18.040 agreements in employee contracts. The FTC now has to consider 0:06:18.160 --> 0:06:20.960 how aggressively it wants to take this issue on. It 0:06:21.040 --> 0:06:24.080 could ban non competes from being used in low wage jobs, 0:06:24.160 --> 0:06:27.080 which some states have done, or it could impose rules 0:06:27.120 --> 0:06:30.800 to make the process more transparent. For example, lots of 0:06:30.839 --> 0:06:33.719 workers are asked to sign noncompete agreements on their very 0:06:33.720 --> 0:06:36.360 first day on the job, when they've already negotiated their 0:06:36.400 --> 0:06:40.000 pay and benefits. The FTC could require early notice for 0:06:40.040 --> 0:06:45.479 such agreements. Star believes that in most cases, non competes 0:06:45.560 --> 0:06:48.440 aren't necessary at all. If a company really wants to 0:06:48.440 --> 0:06:50.920 protect its trade secrets, then it can have workers sign 0:06:51.040 --> 0:06:54.560 non disclosure agreements or n d as. If a business 0:06:54.600 --> 0:06:57.120 wants to protect its investment in clients, then it can 0:06:57.160 --> 0:07:00.440 have workers sign and non solicitation agreement, which would forbidden 0:07:00.520 --> 0:07:03.600 employee from soliciting customers of the business they just left 0:07:03.680 --> 0:07:07.279 for a certain period of time. Four job sectors that 0:07:07.360 --> 0:07:10.640 require months or years of training. There are even contracts 0:07:10.640 --> 0:07:13.040 that require a worker to pay back a portion of 0:07:13.080 --> 0:07:17.480 their training costs if they leave within two years. Starr said. 0:07:17.800 --> 0:07:20.040 The key difference is that all of those other agreements 0:07:20.080 --> 0:07:22.760 are directly tied to the interest that the business is 0:07:22.760 --> 0:07:27.040 trying to protect, but unlike noncompete agreements, they don't restrict 0:07:27.120 --> 0:07:34.960 where workers can go. Today's episode is based on the 0:07:35.040 --> 0:07:38.680 article non compete agreements target janitors as well as vps, 0:07:38.680 --> 0:07:41.160 But why? On how stuff works dot Com written by 0:07:41.200 --> 0:07:44.040 Dave Rhodes. Brain Stuff is production of iHeart Radio in 0:07:44.040 --> 0:07:45.880 partnership with how stuff Works dot Com, and it is 0:07:45.920 --> 0:07:49.200 produced by Tyler Clang. Four more podcasts for my heart Radio, 0:07:49.400 --> 0:07:52.160 visit the iHeart Radio app, Apple Podcasts, or wherever you 0:07:52.200 --> 0:07:53.440 listen to your favorite shows.