California Anti-Noncompete Law Is One Step Too Far

COVID may have waned, but “The Great Resignation” isn’t. It’s no secret that the pandemic caused many workers to take an introspective look at their current situations, with many of them coming to the conclusion they ought to look elsewhere for better options. As policy makers struggle with how to deal with this new reality of a prolonged labor shortage, there may be an effective framework for states to promote the freedom to compete while lessening the impact of unfilled positions. 

A non-compete agreement, sometimes called a restrictive covenant not to compete, is often included in employment agreements. In short, it says that an employee is not allowed to work in a similar industry or region for an extended period of time. Sometimes they are prominently displayed, but often they are hidden in convoluted contract language. They were originally intended to be used against key decision makers in companies, but they often are applied against low-wage employees, like fast food workers

The California Attorney General recently reminded employers and employees that non-compete agreements are categorically unenforceable. Even though most agreements, even with out-of-state employers, have been deemed to be categorically illegal, Attorney General Bonta argues even when they are unenforceable, they still create a chilling effect on the freedom of movement for employees. 

Similarly, President Biden signed an executive order urging the Federal Trade Commission to investigate “unfair” non-compete practices. While this measure may curtail noncompete agreements, states are best positioned to revise their current laws to impact practices in the state. Many states have taken steps to restrict non-compete agreements, which is a welcome sign of improving the freedom of competition which has helped to extend the length of the “Great Resignation.” 

While the intention of restricting the enforceability of non-competes is well-intentioned, national action or overly broad state regulations may not be the most wise policy decision. California perhaps should look at the new Illinois law that went into effect at the beginning of this year. The “Freedom to Work Act” in Illinois invalidates non-compete agreements for workers making less than $75,000 annually, creates major disclosure requirements, and generally makes restrictive covenants in labor contracts difficult to enter into.

The new Illinois model benefits employers and employees alike. Even though noncompete agreements have long been looked down upon by courts, these changes will help prevent dragging new employers, previous employers, and employees through costly litigation. Yet, the next step of having categorically illegal noncompetes may be a step too far. 

The Center for Public Integrity provides a great example of non-compete agreements run amuck. While these restrictive covenants had long been used primarily for high level executives who may have access to trade secrets or other important business information, in practice, there are plenty of others who have been subject to these types of restrictions. 

Michael Kenny was a 52-year old single father who was offered a job as a security guard in Florida. He went through the training program but he was not able to find childcare for the 12 hour shift, beginning at seven in the morning. The job paid Kenny $11.75 an hour. He left the job and was required to reimburse the company for training expenses since he left within 120 days of beginning employment. But the story doesn’t end there. When he went to work monitoring security cameras for a local bank, his previous employer informed the bank which subsequently hired him that he was subject to a non-compete agreement. Litigation ensued and his previous employer sought $50,000 worth of damages for violation of the noncompete agreement. 

The reality is clear: noncompete agreements are not just enforced against Fortune 500 CEOs. More often than not, they’re applied across America against workers who may not even know they exist. 

According to the Department of Labor, the presence of a noncompete can decrease wages by as much as 20%. Noncompetes decrease mobility, competition, and raise uncertainty in the job-seeking process. Noncompetes create a major barrier for small and emerging businesses. How can a local shop justify hiring an employee who is being threatened with an expensive court case by a Fortune 500 company? 

While Illinois law already banned non-competes for those making less than $13.50 an hour, now there is a prohibition for employees making less than $75,000 a year. There is also a 14 day notice requirement, a fee shifting provision for a prevailing employee, and the law only applies to new agreements after January 1, 2022. 

California law takes the Illinois measure a step further by categorically banning noncompetes, but too many restrictions may have the opposite impact than what’s intended. Rather than make it easier for employees to move, too many regulations, especially for top executives and key decision makers, the type of individuals who were the original target of noncompetes, may move jobs elsewhere, especially in the post-COVID world where remote work is likely here to stay. While noncompete agreements alone are unenforceable, when they are used in concert with non-disclosure or non-solicitation agreements to protect trade secrets or confidential business information, they can serve a valuable purpose. 

Hopefully, tailored regulations of non-compete agreements can help prevent unnecessary litigation and assure workers, especially those not serving in top corporate echelons, that they have the ability to freely move across industries and companies. Easing the ongoing labor shortage requires using every tool at our disposal; to unlock the full potential of our labor force, we must empower employees to work not where their former employers permit them to, but where their skills and talents are best rewarded.

Jake Leahy is a Young Voices contributor.