Commentary: Federal noncompete ban good for workers, good for economy

The Federal Trade Commission took aim Thursday at long-standing practices by businesses to curb competition for workers.

The agency proposed a new law that would prevent employers from creating unfair labor contracts — a practice that has been upheld by the Michigan Supreme Court for nearly 40 years.

The agency says the practice is widespread and oppressive to the nearly 30 million Americans who have been involved in such contracts, many of whom are skilled and educated. In Michigan, a 2019 study by the Economic Policy Institute found that nearly 55 percent of the state’s more than 4 million state employees held non-compete agreements.

“Freedom to change jobs is critical to economic freedom and a competitive, thriving economy,” FTC Chair Lina M. Khan said in a statement. “Noncompetes prevent workers from freely exchanging jobs, deny them higher wages and better working conditions, and prevent businesses from having the skills they need to create and grow.”

The organization is correct. Uncompetitiveness hinders the mobility of workers, which reduces productivity which in turn slows economic growth. Non-competes support the brainwashing Michigan business leaders have been pushing for for years. And, finally, non-competes are not even required to protect complex trade secrets.

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But, beyond the moral confusion of preventing workers from seeking pastures where they can thrive, these contracts contribute to worker dissatisfaction and ultimately cost the economy more.

Contract handcuffs.

The basics are as follows: Non-compete agreements often oblige employees, when they leave the company they are supposed to be involved with, to leave their chosen job, thereby leaving behind the necessary training and knowledge that would improve the job; Noncompetes also reduce job confusion. Employees who leave their jobs for success increase economic productivity by matching the right skills with the right jobs and employers.

And let’s not forget that companies use these agreements in secret to push for non-competitive agreements. after the employee has accepted the job. The US Treasury estimates that 37 percent of non-compete employees were informed of the non-compete after accepting the job and after rejecting the competition.

We need look no further than California to see why eliminating non-competes is good for business. California outlawed civil unions in 1872 — even though an estimated 19 percent of state workers are forced to sign those contracts — long before it became a hotbed of technology.

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A study published in 2015 in the journal Research Policy, showed that non-compete agreements encourage manufacturers to leave their homes to countries that do not enforce the restrictions, and that the most talented innovators are the ones most likely to be affected by such agreements. The researchers say it’s a brain drain, depriving some areas of local talent and enriching others.

The study, which looked at the practices of people who registered at least two patents from 1975 to 2005, focused on Michigan, which in 1985 changed its long-standing ban on non-compete agreements. The study’s authors found that after Michigan changed the law, immigration rates were twice as high as in rival states that remained illegal. In fact, Silicon Valley could hardly have been more controversial, especially as Michigan continues to seek to become a technology hub in the age of the electric car.

But even if you, the engineering owner, don’t care about the financial problems of your non-competitors, you still have to ask why you’re willing to force them.

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It is expensive and time-consuming to seek legal remedies against an ex-employee. And, really, what are you defending?

A company does not need to force people to compete in order to protect intellectual property. Nondisclosure agreements are clear and enforceable, especially in a state like Michigan that has long-standing court support for protecting inventions and ideas.

The reality is that non-competition enhances a company’s ability to remain competitive in terms of labor and financial costs. These contracts are handcuffs to bad managers who can’t keep good employees.

Unsurprisingly, employers’ groups are opposed to the White House’s proposal – the US Chamber of Commerce says a complete ban on non-compete agreements “violates well-established federal law” to govern contracts.

It’s clear that the FTC will face legal challenges if it ends – even though the Federal Trade Commission Act of 1914 allows the government to prohibit unfair competition practices.

But if you are supporting the use of non-binding agreements, it is important to understand why. Every business should have competitive secrets protected, but non-compete agreements are nothing more than a relationship created by a jealous partner.


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