Policy

Tech's non-compete agreements hurt workers and anger some lawmakers

"Non-competes have a chilling effect on labor markets."

Person coding on a laptop.

The Workforce Mobility act seeks to restrict the use of non-competes at the federal level.

Photo: heylagostechie/Unsplash

Silicon Valley is a competitive industry — so competitive that some workers find themselves at the mercy of non-compete agreements that their employers made them sign.

Non-compete agreements prohibit employees who leave their jobs from taking similar positions with potential competitors for a certain period of time. In the U.S., somewhere between 27.8% and 46.5% of private-sector workers are subject to non-compete agreements, according to a 2019 Economic Policy Institute study.

Such agreements are unenforceable in California and limited in nearby Washington, but they can still have adverse effects on employees nationwide. That's why a current piece of legislation, the Workforce Mobility Act, seeks at the federal level to restrict the use of non-compete agreements in most situations.

Sens. Chris Murphy and Todd Young introduced the bill, which would only allow non-competes in certain "necessary" situations. A seller of a business, for example, could still be required to sign a non-compete agreement that would prohibit them from starting a similar business in the same geographic area as the original business. Another exception pertains to senior executives who have a severance agreement as part of a company sale.

Murphy and Young first introduced the bill in 2019, and reintroduced it in February for the current 117th Congress. Proponents of the bill did not expect it to make much progress in last year's congressional session, which had a Republican-controlled Senate. This time around, however, observers have more hope for the bill's success. Non-compete legislation also has the support of President Joe Biden, who said during his campaign he would support such a bill.

John Lettieri, president and CEO of the Economic Innovation Group, is a proponent of the Workforce Mobility Act and suggested the bill should enjoy broad support.

"We believe we're in a position where it's possible for this to become law," Lettieri told Protocol. "Whether you're a free market conservative or whether you're a pro-worker progressive, you can come from either of those ends of the spectrum and end up in the same place. And this is a special issue for that reason."

EIG, founded by Lettieri, Sean Parker and Steve Glickman, became interested in non-compete agreements a few years ago. Since then, EIG has worked to highlight how the pervasive use of non-competes has a "significantly detrimental effect on workers' well-being, but also on the broader economy," Lettieri said.

"Competition is generally good and for workers, competition among businesses for your labor is the most fundamental bargaining power you've got," he said. But if companies hinder that with non-compete agreements, they create "a downstream series of consequences that really are bad for the worker, they're bad for the broader labor market and it's increasingly clear they're bad for the broader economy as well."

Non-competes, he said, "have a chilling effect on labor markets," meaning that they prohibit better wages for workers, limit worker mobility and stifle innovation — "even for workers who don't sign."

Non-competes in the tech industry

California, where many tech companies have their headquarters, does not legally allow the enforcement of non-compete agreements. But in places where they are legal, some tech companies still use them to their advantage.

States such as Washington and New York, for example, both allow non-compete agreements. Recent legislation has limited the scope of non-compete agreements in Washington so they can only affect employees with annual salaries of more than $100,000 or independent contractors who make more than $250,000 per year from a single employer. But employees working in tech are likely to make north of $100,000 and may therefore be subject to non-compete agreements.

New York allows non-competes, but Attorney General Letitia James has spoken out about the harm of non-compete agreements. In 2017, proposed legislation sought to limit the enforceability of non-compete agreements, but the legislature did not adopt it.

Companies such as Amazon and Microsoft — both headquartered in Seattle, Washington — and New York-headquartered IBM have all sued employees for breaking the terms of their non-compete agreements.

In 2018, IBM sued human resources executive Lindsay-Rae McIntyre after she joined Microsoft as the company's chief diversity officer. At the time, IBM said McIntyre had access to "highly confidential and competitively sensitive information" pertaining to diversity and inclusion at IBM.

IBM also used its suit against McIntyre as an opportunity to throw some shade at Microsoft.

"While we can appreciate Microsoft's need to deal with mounting criticism of its record on diversity, IBM intends to fully enforce Lindsay-Rae's non-compete agreement — just like we do with all of our senior leaders — to protect our competitive information," an IBM spokesperson said to GeekWire at the time.

IBM eventually agreed to settle the suit. Protocol reached out to IBM for comment but didn't hear back.

Microsoft in 2011 filed a lawsuit against a former general manager, Matt Miszewski, who left to work at Salesforce. Microsoft succeeded in obtaining a temporary restraining order based on the non-compete agreement Miszewski signed. The judge in the case ultimately sided with Microsoft, saying Miszewski could not work in a similar role at Salesforce.

Microsoft declined to comment on its use and enforcement of non-compete agreements.

Amazon has similarly sued employees alleging violation of non-compete agreements. Amazon sued a former Amazon Web Services executive in 2019 for joining Google Cloud, only a couple of years after it sued a former AWS VP for joining startup Smartsheet. Another Amazon manager recently told Protocol she felt a non-compete Amazon required her to sign "unfairly handcuffed" her to the company.

Protocol obtained an example of the non-compete language from an Amazon confidentiality, non-competition and invention assignment agreement:

"During employment and for 18 months after the Separation Date, Employee will not, directly or indirectly, whether on Employee's own behalf or on behalf of any other entity (for example, as an employee, agent, partner, or consultant), engage in or support the development, manufacture, marketing, or sale of any product or service that competes or is intended to compete with any product or service sold, offered, or otherwise provided by Amazon (or intended to be sold, offered, or otherwise provided by Amazon in the future) that Employee worked on or supported, or about which Employee obtained or received Confidential Information."

In the case of Charlotte Newman, head of underrepresented founder startup business development at Amazon, her non-compete has kept her in an abusive and harmful environment. Newman asked Amazon to release her from the non-compete last October, after coming forward about harassment and discrimination at the company. Amazon, however, declined her request, Newman previously told Protocol.

Amazon did not respond to our request for comment for this story, but previously declined to comment on its use of non-compete agreements.

Lettieri observed that non-compete agreements can indeed force workers, such as Newman, to stick with toxic environments. "If you think about workplace inequities and abuses, non-competes have that lock-in effect for workers," Lettieri said.

That means workers have to choose between staying in an abusive environment for the sake of their career or starting a new career elsewhere while bound to the terms of the non-compete. In Newman's case , it would be for at least 18 months if she were to leave Amazon.

"And then you'll earn the right to reintegrate yourself back into the career you've actually chosen," Lettieri said. "And it's just, you know, completely upside down from an economic standpoint."

Misuse and abuse of non-competes

While Microsoft, IBM and Amazon wouldn't comment on their use of non-competes, companies generally implement and enforce them in an attempt to protect trade secrets. There's also an incentive to implement non-compete agreements if your competitors do.

"So you don't want to be the one that gets poached [from] when everyone else uses their non-competes to protect their workforce from competition," Lettieri said.

Regarding the trade secrets argument, Lettieri pointed to the fact that "you do not need a non-compete to do that." Companies can have employees sign non-disclosure agreements. The Trade Secrets Protections Act also enables companies to bring a lawsuit against anyone who improperly shares that company's trade secrets.

Businesses will also say they've invested their time and resources into training that employee, Lettieri said. But that's problematic, he pointed out, because that means a company is claiming ownership of the expertise and knowledge an employee obtained even before that job.

"And so it's laying claim to something that I think, just at the rational and fairness level, doesn't belong to the employer to claim if there's not a compensation involved towards," he said.

Non-compete agreements, in most cases, are also rarely negotiated, Lettieri said. Instead, employees usually receive them on their first day of work.

"You weren't saying, 'OK, well I'll sign away two years of my post-employment life to the company, but in exchange, I want a signing bonus or I want 20% higher pay.' That didn't happen," he said. "You've already turned down all those other jobs and already left your other job."

That's another example, Lettieri said, of how companies can use non-compete agreements in "un-transparent, abusive ways that don't actually speak to a mutual exchange of value among equal parties."

Sometimes, it also doesn't matter if the employee has left on their own accord or has been fired or laid off, Lettieri said. Amazon's non-compete agreement, for example, lasts 18 months after the date of separation, "whether it was voluntary or involuntary," according to the agreement.

"I mean, that is absurd," Lettieri said.

Companies sometimes have employees sign non-compete agreements even if the state doesn't legally allow it. Workers sign non-compete agreements at about the same rate in states that enforce non-compete agreements compared to states that don't, according to a 2015 research paper in the Journal of Law and Economics. In California, where non-competes are illegal, 45.1% of companies surveyed subjected some of their employees to non-compete agreements, according to a 2019 study of 82 companies.

"This actually is a perfect example of why non-competes are so abusive," Lettieri said. "The whole premise of how they're used, in practice, is to exploit the asymmetry of knowledge and resources between the employer and the employee."

This leaves a big question mark around why an employer would do that, he said.

Lettieri thinks employees sign them "out of ignorance about what's enforceable or not, and out of ignorance out of trust that, 'Well, I wouldn't be asked to sign this document if it wasn't legit.' They sign them anyway. And they abide by them anyway."

It's possible that more legally-savvy, well-educated workers might be more aware of their bargaining power and not sign the non-compete, but Lettieri said that's a "very small, small, tiny proportion" of the workforce.

"So that's why that's why the federal legislation is so important," he said. "Even in states that on paper have the best policy towards non-competes, there's still a big gaping loophole in terms of in practice and how employers use them."

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