Why Noncompetes Could Soon Be a Non-Thing

Wacky stories of fry cooks who can’t move to a competitor’s grill for a raise, or mid-level execs with ambition and a bright idea who can’t start their own firms make noncompete agreements easy to hate. A proposal this year by the Federal Trade Commission (FTC) that would ban most noncompetes is based heavily on research by Evan Starr, a UMD associate professor of management.

Starr, an economist, has spent years studying the use of these agreements for both low-wage workers and employees with specialized skills, documenting their sometimes-crippling effects. The FTC was still gathering comments on its proposed rule this spring when Starr spoke to Terp about the growing move to curb noncompetes and his own experience with them.

What’s the silliest noncompete clause you’ve heard of?
When I was in grad school, my wife volunteered for Girls on the Run International, a nonprofit that takes girls running after school. At the end of her signup form was a two-year noncompete agreement to the effect that you could not start or even help any after-school physical education program for girls.

For people never confronted with a noncompete, why should they care?
We tend to think of noncompetes in isolation—a given worker signs one. But what happens when a whole labor market is bound by noncompetes? If most firms use them, how can anyone start a new firm? And if someone does start a new firm, who can they hire? As a worker, who is going to give you a job offer if you want a raise? Our main finding in one paper was that in places with widespread, enforceable noncompetes, the entire labor market is less dynamic. You may be affected by someone else’s noncompete and not even know it.

Your research underpins a lot of the Biden administration’s deliberations on this, as well as pending FTC rules. Where does all the interest come from?
Much of it is a continuation of concerns from the Obama administration. In 2014 we had the Jimmy John’s case where noncompetes were being used for minimum-wage sandwich makers, and there was the case of Amazon asking temporarily employed packers to sign 18-month noncompetes that prohibited them from working in any industry anywhere in which Amazon was selling anything. It was extreme.

What’s likely to happen?
I do expect the FTC will move forward with their rule. There’s a question of whether it will cover everyone or if there will be carveouts for top executives. In the short run, if the FTC’s rule goes into effect, there will likely be legal challenges, and a decision will be made as to whether the proposed rule will be allowed to come into effect as the courts address the challenges.