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Sara Parker McKernan, a legislative and policy advocate at New Haven Legal Assistance Association, remembers a receptionist who came to one of her partner associations looking for help.
According to McKernan, the receptionist, who worked at a lawyer referral agency, had signed an agreement with her employer saying that once she left the agency, she could not work at a similar job within a 20 mile radius for five years.
“She was stuck in this minimum wage job … feeling as if she had no way out of it and didn’t know how to really move on,” said McKernan, who works with three legal assistance agencies in the state.
McKernan said this case was emblematic of the difficulties that low-wage workers face when they are confronted with non-compete agreements — contract clauses that restrict workers’ abilities to move between employers within a given field.
“I feel like it has kind of a chilling effect on employees who are kind of intimidated into thinking that they don’t have any recourse against it,” said McKernan. “And in the process, they actually end up feeling like they can’t leave for a better job with higher pay or improve their skills.”
In an effort to help these low-wage workers, members of the state legislature’s Labor and Public Employees have once again raised a bill that would restrict the ability of businesses to create contract clauses that limit workers’ ability to move between places of employment.
Traditionally, non-competes were used to protect companies from employees who, when they left their jobs, took either trade secrets or clientele with them. Economist Evan Starr, who submitted testimony on the bill last year, told CT Examiner that non-competes have been around since the time of trade guilds, when master craftsmen wanted to prevent apprentices from taking the skills they had learned and setting up competing shops.
But research by economists over the last decade has shown that the number and the variety of workers affected by these agreements is much broader than originally thought.
“I’d say the prior belief was that these were primarily being used in high-tech companies to protect [Research and Development], but they discovered that, in fact, they were also very prevalent in even … labor where it’s hard to imagine that the purpose was protecting intellectual property,” said Olav Sorenson, an economist at UCLA who previously taught at Yale.
Sorenson said that non-competes tend to become more of an issue in economic situations like the current one, when the labor market is “tight” — not enough or barely enough workers to cover the open positions. When that happens, workers have more options, and might want to leave a lower quality job for one with more benefits. That’s when non-competes can throw a wrench into the works.
McKernan said she has seen these contracts affecting a variety of low-wage workers.
“Fast food workers, home care agency workers, receptionists, we’ve seen a ton of different variations of this contract clause,” she said.
“Too intimidating”
State Sen. Julie Kushner, D-Danbury, one of the co-chairs of the labor and public employee committee, said that she was surprised to hear that certain employees, such as fast-food workers, have to sign non-compete agreements.
“What’s amazing to me is that someone who’s working at a McDonald’s might have to sign a non-compete to work there and not be able to go to another similar operation from a competitor, like a Burger King or a Wendy’s in the immediate area,” said Kushner. “It makes no sense to me … if it’s happening, we need to make sure that we can stop it.”
State Rep. Harry Arora, R-Greenwich, ranking member on the committee, said he sees no problem with limiting non-competes for minimum-wage workers. But, he said that he felt businesses should have the ability to ask managers to sign non-compete agreements, since they have access to information that is valuable to the business. He said there was also a potential for managers who left for a competing business to take other employees from the business with them when they leave.
Arora said that while it might be possible to limit employers from requiring non-competes for workers below a certain income level, he said it’s very difficult to define what constitutes a trade secret or proprietary knowledge.
Senator Rob Sampson, R-Wolcott, also a ranking member on the committee, said that he believed the state legislature shouldn’t be regulating agreements between private employers and their employees at all.
“I don’t believe that it is the role of state government to interfere with a private agreement between adult citizens,” said Sampson.
Sampson also said that employees sign these contracts of their own free will, and that if more people pushed back, corporations would stop using them.
“No one is forcing anyone to sign a contract or terms of employment that they don’t agree with. It is free will every time. And if people don’t want to work in situations where those contracts are offered, they don’t have to,” said Sampson.
But Starr and McKernan said that employees rarely push back against a non-compete agreement.
“By and large, when workers are presented with non-competes, about 86% of the time they just read them and sign them. Only 10% of the time do they actually try to negotiate either the terms of the contract or extra money, or other benefits in exchange,” said Starr.
Sorenson also said that sometimes these workers are presented with non-compete agreements after they have already accepted the job and quit their prior job, sometimes on their first day of work, which he referred to as a “pretty abusive practice.”
McKernan said that low-income workers are also unlikely to challenge these agreements because they don’t have the money for a lawyer or the resources to go to court. She also said that, although it’s unlikely that their employer would actually bring them to court, the employees are still afraid of the consequences of defying the agreement.
“They don’t have the power in this relationship. They don’t know what will happen and they don’t have the resources or the means to actually challenge something like that. So instead of taking the chance and feeling like they’re breaking the law or something, they are going to probably stay put in their jobs with a non-compete agreement because it’s frankly too intimidating to challenge something like that,” said McKernan.
“Very, very unfair to the entrepreneur”
Non-compete agreements attracted attention nationwide after President Joe Biden issued an Executive Order last July urging the Federal Trade Commission to look into and possibly restrict the use of non-compete clauses and other agreements that “unfairly limit worker mobility.”
Nevada, Colorado, Illinois and Washington D.C. recently placed restrictions on non-compete agreements in their states. According to a recent commentary article in Reuters, 30 states now have laws that in some way regulate non-compete agreements.
The current Connecticut draft legislation would prohibit non-compete agreements for workers that make below three times the minimum fair wage. It limits non-competes to a one year duration in a specific geographical area and requires that employees receive the agreements in advance of beginning employment, and accompanied with information about workers’ rights.
In addition to hurting workers, Sorenson said that non-competes can also be bad for business. A non-compete agreement can stop someone from becoming an entrepreneur in their field and it also makes it difficult for new companies or businesses to hire workers, he said.
Sampson disagreed. He said that non-competes can actually protect new businesses. For instance, he said, if an employee decided to leave an insurance agency and took the agency’s clients with him or her, it would present a threat to the business.
Arora also said that entrepreneurs and small businesses needed to be protected from similar risks.
“You know, you invest in a business, it starts going, and your manager basically, or people who you hire, know a lot about it. And they just basically step out of the business and compete with you right across the street and take your customers, take your franchise away or take your business away,” Arora said. “It’s … very, very unfair to the entrepreneur, who has risked everything.”
McKernan and Steven Lanza, an economist at UConn, said that there are times when non-competes are warranted — for instance, when there are real trade secrets at risk, and Sorenson said a non-compete could also be warranted in a situation where someone leaving a firm could take a large number of clients with him or her.
But Lanza said that, rather than using non-compete agreements, which he called a “blunt instrument,” it would be better to use laws that directly prohibit the divulging of trade secrets. Sorenson said these laws already exist at the federal level.
“Even if you’re not covered by a non-compete agreement, you’re not allowed to take trade secrets with you from a prior employer to a new employer, and that’s actually a federal level law,” said Sorenson. “So it’s not as though there’s no protection if there truly are trade secrets.”
Lanza said that non-competes tend to stifle economic growth. He used the example of Silicon Valley, where he said workers in the technology industry move between firms with a lot of fluidity, bringing with them knowledge from their prior jobs — a model that he said fostered creativity and innovation.
“Economists think that markets should have pretty free entry and exit into industries and positions and things like that, both for firms and for workers. And I think that this is a real unnecessary and inefficient and uneconomic limitation on the freedom of markets to function,” said Lanza.
Lanza also said that non-competes can disincentivize employers from offering a better working environment.
“They know that their workers are sort of at their mercy. And so they don’t have to offer a better environment because they know it’s going to be difficult for them to leave there and go someplace else,” he said.
Sorenson and Starr also say that there needs to be better data collection around how frequently non-competes are used and the contents of the agreements. Starr said he has asked the Federal Trade Commission several times to investigate the contents of employee contracts.
Starr acknowledged that it can be difficult to police what employers put in their contracts. However, Starr, Sorensen and McKernan all said they believed that having legislation would make a difference.
“Not enforcing the agreements, even if people are still often required to sign them, I think goes a long ways in terms of preventing them from locking people into a particular employer,” said Sorensen.
Editor’s note: An earlier version of this story said Sara Parker McKernan was an attorney for New Haven Legal Assistance Association, instead she is a legislative and policy advocate and works with three legal assistance services in Connecticut, one of which is New Haven Legal Assistance Association. Also, McKernan worked with the receptionist at Connecticut Legal Services, not New Haven Legal Assistance Association.