Can We Justify Non-Compete Clauses?

In the State of the Union, President Joe Biden claimed that 30 million workers have non-compete clauses. This followed a proposal by the Federal Trade Commission to ban these clauses. Non-compete clauses normally contain two portions. First, they prohibit employees from using any proprietary information or skills during or after their employment. Second, they forbid employees from competing with their employer for some period of time after their employment. “Competing” normally consists of working for a rival company or starting one’s own business in the same industry.

Non-compete agreements are more common than one might expect. In 2019, the Economic Policy Institute found that about half of employers surveyed use non-compete agreements, and 31.8% of employers require these agreements for all employees.

While we often think of non-compete agreements as primarily being found in cutting-edge industries, they also reach into less innovative industries. For instance, one in six workers in the food industry have a non-compete clause. Even fast-food restaurants have used non-compete clauses.

Proponents of non-compete clauses argue that they are important to protect the interests of employers. The Bureau of Labor Statistics estimates that, in 2021, the average turnover rate (the rate at which employees leave their positions) in private industry was 52.4%. Although one might think the pandemic significantly inflated these numbers, rates from 2017-2019 were slightly below 50%. Businesses spend a significant amount of money training new employees, so turnover hurts the company’s bottom line  – U.S. companies spent over $100 billion on training employees in 2022. Additionally, the transfer of skilled and knowledgeable employees to competitors, especially when those skills and knowledge were gained at their current position, makes it more difficult for the original employer to compete against rivals.

However, opponents argue that non-compete clauses depress the wages of employees. Being prohibited from seeking new employment leaves employees unable to find better paying positions, even if just for the purposes of bargaining with their current employer. The FTC estimates that prohibiting non-compete clauses would cause yearly wage increases in the U.S. between $250 and $296 billion. Further, for agreements that extend beyond their employment, departing employees may need to take “career detours,” seeking jobs in a different field. This undoubtedly affects their earnings and makes finding future employment more difficult.

It is worth noting that these arguments are strictly economic. They view the case for and against non-compete clauses exclusively in terms of financial costs and benefits. This is certainly a fine basis for policy decisions. However, sometimes moral considerations prevail over economic ones.

For instance, even if someone provided robust data demonstrating that child labor would be significantly economically beneficial, we would find this non-compelling in light of the obvious moral wrongness. Thus, it is worthwhile to consider whether there’s a case to be made that we have moral reason to either permit or prohibit non-compete agreements regardless of what the economic data show us.

My analysis will focus on the portion of non-compete clauses that forbids current employees from seeking work with a competitor. Few, I take it, would object to the idea that companies should have the prerogative to protect their trade secrets. There may be means to enforce this without restricting employee movement or job seeking, such as through litigation. Thus, whenever I refer to non-compete agreements or clauses, I mean those which restrict employees from seeking work from, or founding, a competing firm both during, and for some period after, their employment.

There’s an obvious argument for why non-compete clauses ought to be permitted – before an employee joins a company, they and their employer reach an agreement about the terms of employment which many include these clauses. Don’t like the clause? Then renegotiate the contract before signing or simply find another job.

Employers impose all sorts of restrictions on us, from uniforms to hours of operation. If we find those conditions unacceptable, we simply turn the job down. Why should non-compete agreements be any different? They are merely the product of an agreement between consenting parties.

However, agreements are normally unobjectionable only when the parties enter them as equals. When there’s a difference in power between parties, one may accept terms that would be unacceptable between equals. As Evan Arnet argues in his discussion of a prospective right to strike, a background of robust workers’ rights is necessary to assure equal bargaining power and these rights are currently not always secure. For most job openings, there are a plethora of other candidates available. Aside from high-level executives, few have enough bargaining power with their prospective employer to demand that a non-compete clause be removed from their contract. Indeed, even asking for this could cause a prospective employer to move on to the next candidate. So, we ought to be skeptical of the claim that workers freely agree to non-compete clauses – there are multiple reasons to question whether workers have the bargaining power necessary for this agreement to be between equals.

One might instead appeal to the long-run consequences of not allowing non-compete agreements. The argument could be made as follows. By hiring and training employees, businesses invest in them and profit from their continued employment. So perhaps the idea is that, after investing in their employees, a firm deserves to profit from their investment and thus the employee should not be permitted to seek exit while still employed. Non-compete clauses are, in effect, a way for companies to protect their investments.

Unfortunately, there are multiple problems with this line of reasoning. The first is that it would only apply to non-compete agreements in cases where employees require significant training. Some employees may produce profit for the company after little to no training. Second, this seems to only justify non-compete clauses up to the point when the employee has become profitable to the employer – not both during and after employment. Third, some investments may simply be bad investments. Investing is ultimately a form of risk taking which does not always pay off. To hedge their bets, firms can instead identify candidates most likely to stay with the company, and make continued employment desirable.

Ultimately, these argument regarding what a company “deserves” lays bare the fundamental moral problem with non-compete agreements: they violate the autonomy of employees.

Autonomy, as a moral concept, is about one’s ability to make decisions for oneself – to take an active role in shaping one’s life. To say that an employee owes it to her employer to keep working there is to say that she does not deserve autonomy about what does with a third of her waking life. It says that she no longer has the right to make unencumbered decisions about what industry she will work in, and who she will work for.

And this is, ultimately, where we see the moral problem for non-compete clauses. Even if they do not suppress wages, non-compete agreements restrict the autonomy of employees. Unless someone has a large nest egg saved up, they may not be able to afford to quit their job and enter a period of unemployment while they wait for a non-compete clause to expire. Especially since voluntarily quitting may disqualify you from unemployment benefits. By raising the cost of exit, non-compete clauses may eliminate quitting as a viable option. As I have discussed elsewhere, employers gain control over our lives while we work for them – non-compete agreements aim to extend this control beyond the period of our employment, further limiting our ability to choose.

As a result, even if there were not significant potential financial benefits to eliminating non-compete agreements, there seems to be a powerful moral reason to do so. Otherwise, employers may restrict the ability of employees to make significant decisions about their own lives.