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The Crippling Contract Clause Holding You Back from Advancement
The FTC wants to ban noncompete clauses. Here’s why you should support this
Do you have an employment contract? If so, when’s the last time you checked its terms? Dig it out from your files and take a close look, because you may have some restrictive covenants in it, such as a “noncompete” clause that could severely limit your next job search.
According to the American Bar Association, a noncompete clause is one that “prohibits a former employee from competing against his or her former employer within a particular geographic area for a specified period of time.” So you can’t quit your job to go work for a rival company or start a competing business, usually for at least six months and up to two and a half years. Sometimes, as in the case of the sale of a business, the duration of a noncompete can be five years, while some states don’t even have time limits, says Wendi Lazar, a partner at specialty employment law firm Outten & Golden where she coheads the firm’s Individual Practice and the Executives and Professionals Practice Group, representing many high-level female executives. According to Lazar, depending on what contract law calls “adequate consideration,” which in simplified terms means the benefits each party gets or expects to get in a deal, you might not be guaranteed any compensation during the noncompete period.
Other kinds of restrictive covenants include the non-solicitation clause, which prohibits a former employee from trying to drum up business from their former company’s clients, and the confidentiality clause, which prevents a former employee from disclosing or using proprietary information from their past employer or their past employer’s clients. The noncompete clause, however, is considered by the ABA to be the most restrictive. Yet there is no national norm for the use, or enforceability, of noncompete clauses; each state does their own thing. For example, some states — including California, North Dakota, and Oklahoma — have already rendered noncompete clauses void. Other states have limited the duration of noncompetes, such as Massachusetts, which reduced them to one year. Yet others, including Hawaii and New Mexico, have restricted or prohibited the use of noncompetes for specific industries.
At the beginning of this year, the Federal Trade Commission (FTC) proposed a rule to ban noncompete clauses, to which some 18 percent of US workers are subject. FTC Chair Lina Khan stressed that noncompete clauses prevent workers from freely changing jobs, which denies them the possibility of increased wages and improved working conditions. Lack of worker mobility also makes it hard for businesses to have access to a full talent pool, which is essential for growth and competition. The FTC claims the ban could “increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.” Citing research, the FTC noted that the banning of noncompete clauses could close racial and gender wage gaps by anywhere from 3.6 to 9.1 percent. Women need to care about this. Some employment experts believe that women and people of color are the groups most adversely affected by noncompete clauses and their implied lack of work mobility. This is due mainly to these groups’ perennial struggle to have salary and career advancement keep pace with white males.
While there is no exact scientific proof that noncompete clauses harm women more than men, there is plenty of anecdotal evidence, in addition to academic studies that suggest this restrictive covenant is highly detrimental to women.
“For women, this is a loaded question,” Lazar adds. She notes that her observations are based solely on what she sees in her work. A big problem is the clichéd but often true habit of women being too nice in the workplace.
“Unlike men, women have to fight harder to get the senior position. They tend to assume the best in a situation, and are often just very happy to be getting a job. They are less critical in the process and do not negotiate the terms of their employment or challenge the contracts as aggressively as men might,” Lazar adds.
“After 30 years of practice, I can’t give you numbers, but many high-level women [have not been] willing to sacrifice the job just to avoid a noncompete, given the competition with male colleagues,” Lazar states. She adds, however, that this posture is changing with more women in senior and leadership positions
“Women, who work so hard to build their reputation, are more careful to take an ax to their employers with whom they don’t want to fight,” says Kerry Zaroogian, Counsel at Outten & Golden and the firm’s point person on the FTC and noncompete clauses. “Noncompetes mean they don’t have an escape hatch from toxic or hostile work environments, which disproportionately impact women.”
This predicament is compounded by the fact that women, noncompetes aside, tend to stay in their jobs longer than men. While they might be thriving, their resumes and salaries can get stale, Lazar notes. Men change jobs more frequently, leading to advanced career opportunities and systematic salary increases; they might be more aware of the consequences of noncompete clauses and fight harder in job negotiations and employment contracts, Lazar explains. A recruiter will pull candidates from the pile of those who don’t have noncompetes, she notes, because “it’s easier to sell that individual who is free to compete.” Thus, it appears that women will continue to have weaker career advancement and lower salaries than men for similar jobs, at least in the short term.
Noncompete clauses are used across almost all sectors of the economy. Their use in medicine, even for one-year durations, is particularly tough, says Lazar. “The mere idea that a doctor cannot treat their patient in an area where he or she lives because of a noncompete or non-solicitation provision is harsh,” Lazar observes. “What happened to patient choice?”
Attorneys, meanwhile, pretty much banned applying noncompetes to their practices. As for workers in lower wage jobs, USA Today reported the Economic Policy Institute findings that roughly 30 percent of businesses where the hourly wage was less than $13 per hour used noncompete agreements. In the US, women represent more than two in three minimum-wage earners, according to the National Women’s Law Center, and earn about 83 cents per every dollar earned by a man, as per the US Census Bureau. The math seems pretty clear.
“You’re not going to jail if you breach [your contract],” explains Lazar. “You may enter a painful, conflictual legal battle where your current employer could sue and may disparage you, and the court could enjoin you before trial from working for the new employer. So, you lose both opportunities.”
It can become a real mess.
“It is also hard to start off a new relationship with a new employer when you are fighting your old employer,” Lazar adds. “Many of these cases are settled out of court; however, if the employee has leverage with the new employer, how badly does the new employer want that person? Are they willing to make an offer to the old employer and will it be accepted?”
It also appears that noncompete clauses dissuade female entrepreneurship by indirectly discouraging women from creating start-ups. If a woman has a noncompete clause in her contract — remember, she didn’t negotiate it out — then leaving her company can be so painful that she gives up on the idea of starting her own business.
Matt Marx is a senior chair in entrepreneurship at Cornell University’s business school and an associate at the National Bureau of Economic Research. In particular, he studies topics surrounding gender and entrepreneurship, notably “macrolevel institutional policies” that are not aimed specifically at women, but discourage them from creating a new business.
In 2021, Marx published his study’s findings about the impact of noncompete clauses on female entrepreneurship in Organization Science. After examining workers and enforceability for noncompete clauses from 25 states including Washington, DC, and from 1990-2014, he concluded that “…noncompetes add legal risk to business risk. To the extent that women exhibit greater risk aversion, the threat of litigation from their ex-employer may act as a sharper brake on startup activity than for men.”
“Congress and the FTC should be doing something about noncompete clauses. They are arcane,” says Lazar.
Industries all move so fast given the Internet and digitization, Lazar observes. Companies and people pivot, and strategies change, lasting six months and not two and a half years, which is often the length of a noncompete.
“California, with a ban on noncompetes, has proven they are not worth it,” Lazar emphasizes. “They can hinder creativity, mobility and invention.”
It seems that some companies employ noncompetes as a blanket solution to their woes about competition, rather than relying on other more specific restrictive covenants, such as nondisclosure or non-solicitation clauses. The latter two act directly on what a company could be most worried about, such as an employee divulging trade secrets or going after former clients. Moreover there are some federal laws, including the Defend Trade Secrets Act passed in 2016, that protect companies from an illicit form of competition without limiting the mobility of an employee the way a noncompete clause does.
“[Noncompete clauses are] very different — this is about being able to walk across the street and do what you do for a living and do the same kind of job — or start a job with a friend,” Lazar explains. “It’s not about theft of ideas, property, or personnel. Noncompete clauses prevent employees from making a living and advancing in their fields. They do not prevent unfair competition.”