The free movement in and out of jobs is essential for a dynamic, entrepreneur-driven economy. Yet many states enforce employer noncompete agreements that lock employees into their current jobs and hamper new business creation. About 14% of workers without a college degree and 13% of workers earning less than $40,000 annually are subject to noncompete agreements. Although these workers are half as likely to possess trade secrets compared with their higher-earning peers, noncompete agreements can deter these individuals from starting a business in their area of experience. To curb the negative impacts of noncompete agreements on entrepreneurship, policymakers should:
- Restrict the use of noncompete agreements through outright bans or by shortening the maximum duration of these contracts and narrowing the scope of industries and jobs for which noncompete agreements may be used. This is important because more capitalized firms are able to navigate these laws through lawyers and consultants while undercapitalized firms cannot, creating an even greater imbalance in power.
- Improve transparency by requiring employers to disclose their intent to use a noncompete in job postings and offers.
- Greater enforceability of noncompetes has been found to reduce new business creation by as much as 18%, with disproportionate effects on women.
- Research indicates that noncompete agreements act as a brake on entrepreneurial entry, although this effect is limited to intra-industry spinoffs in which employees of one company leave to found a new firm, a rival in the same industry.
Policy in Practice: Several states took action in 2019 to reform and restrict noncompete agreements, including the state of Washington. Policymakers in Washington banned any noncompete agreement lasting longer than 18 months and made such agreements unenforceable for employees making a salary less than $100,000 per year. Washington also increased transparency by requiring employers to give potential employees notice of noncompete agreements prior to their employment start date. Policymakers in Maine and Oregon took similar steps to improve transparency. These policy steps are still recent and are being monitored to observe the long-term impact.