Non-compete agreements, wherein an employee agrees not to work for a company’s competitors for some time after leaving the company’s employ, became popular during the dot-com era of the 1990s, when internet companies were struggling to grow as fast as possible and had to keep their intellectual property from falling into competitors’ hands. A competitor could shave months or years off of their development time by poaching employees from a company that is further along in development.
As the internet space matured, the need to grow fast quickly became less pressing. Yet, non-compete agreements remained and spread beyond technology companies into healthcare, finance and even retail. And they have become weaponized, such that employers now use them to prevent employees from demanding higher wages.
A non-compete agreement makes it harder for workers to obtain competing offers to use as leverage in asking their current employers for raises. Imagine what would happen if, as a condition of buying a car from your local car dealer, you had to agree not to buy your next car from a competing dealership. When it came time to buy your next car, you wouldn’t be able to comparison shop, and so would find it much harder to negotiate the price. That’s great for the car dealer but not so much for you.
What’s new is that President Biden is pushing to ban non-compete agreements. One of the dangers of banning contracts is that the people who do the banning typically don’t understand what role the contracts play.
Consider the occasional call for banning futures contracts. To those who don’t use them, futures contracts look like mere gambling and, in fact, can be used for gambling. But futures contracts serve an important role in enabling farmers to lock in the price of a crop before it’s even planted. This significantly reduces the farmer’s risk in planting a crop, increasing the quantity of crops planted.
Banning futures contracts is a horrible idea that would only be proposed by someone who has no understanding of why futures contracts exist in the first place. A similar danger lies in banning non-compete agreements.
But just agreements are often symmetric — or, as the saying goes, what’s good for the goose is good for the gander. If the government is intent on weighing in on non-compete agreements, there is a better option than banning them. Instead, require that non-compete contracts apply equally in both directions. If a non-compete agreement prohibits a worker from working for a competing employer for 12 months, then the agreement, by symmetry, should also prohibit the employer from hiring a competing worker for 12 months. That is, if the employee may not switch jobs, then the employer may not switch employees.
This doesn’t mean that an employer couldn’t fire a worker covered by the non-compete agreement, any more than it means that the worker couldn’t quit. It simply means that the employer couldn’t hire another worker to fill the vacant position, just like the worker couldn’t take a job at a competing company.
Banning non-compete agreements is a ham-handed approach to addressing their potential weaponization. A better approach is to ensure that employers and employees are on equal footing regarding mobility and competition by requiring that the terms of the non-compete apply equally to the company’s competitors and to the employee’s competitors.
