My first non-compete agreement secured me a well-paying job that trained me to become a skilled technician. Thanks to the Federal Trade Commission’s new plan to ban non-compete agreements, low-skilled workers trying to break into the trades won’t have the opportunity I did.
Last week, the FTC stated its intention to ban non-compete agreements in the United States, claiming that doing so would “increase American workers’ earnings between $250 billion and $296 billion per year,” and “expand career opportunities for about 30 million Americans.” While the ban might create opportunities for some workers now, it does not guarantee increased salaries in the trades and could limit opportunities for workers down the road. If lawmakers want to improve opportunities for workers, they must carefully consider the effects this ban would have in the long term.
I was 20 years old, delivering pizzas for $12 an hour, when an acquaintance of mine — a local businessman — approached me with an offer to work as an information technology technician, subcontracting for his company. He offered a decent wage and provided both the training and the necessary tools to do the work. The catch? He had me sign a non-compete agreement, not dissimilar to those signed by some 18 percent of Americans. The agreement stipulated that I wasn’t allowed to pilfer his clients, underbid him on jobs, or work in the local tech industry within two years of leaving my employment with him, or I would face a $10,000 fine — pennies compared to many non-compete penalties.
But that was a lot of money to me back then. After about eight months on the job, one of my boss’s clients, impressed by the quality of my work, offered to double my current wage if I would work for him directly. I was tempted, but that fine loomed large. I turned down the offer, frustrated. Had the FTC said it would be banning non-compete agreements back then, I would have been thrilled. But at 21, I didn’t know how to think like an economist: Without that non-compete agreement, I would never have been trained as a technician in the first place.
Ban Would Reduce Training Opportunities
Banning non-competes would have been a mistake back then, and it’s a mistake for the FTC to ban them now. Doing so will only force low-skilled workers to shoulder the cost of the education needed to break into the trades, while reducing transparency within companies.
Look at it from my employer’s perspective: I had no real knowledge of tech work when I started, so he trained me from scratch and provided me with a job, the tools I needed, and mentorship. Taking on an employee who had no knowledge was already a risk. What would happen if he took on the costs of training me and, as soon as I was up to speed, I simply quit and went to work for his competitor? He would bear the costs with next to none of the benefits.
No employer would want to take the risk of hiring an untrained worker, training them, and sharing important client information with them if they had no guarantee the employee would stick around. Without contractual obligations, what’s to keep a rival business from poaching valuable, newly trained workers? What’s to keep an ambitious worker from accepting paid training and then striking out on his own, undercutting his employer and taking his clients? Given that no employer wants to pay to train his competitor, without the protection of a non-compete, he would have reason to push the cost of training onto the worker. Trade school costs between $3,600 and $16,000, and graduates often still need more training. Do we really want low-skilled workers to have to bear that expense?
Pros and Cons
The current FTC analysis argues that banning non-compete agreements would free up the flow of labor, drive up wages, and improve efficiency in the market. But doing so would also disincentivize employers from training new workers in the field and trusting them to do their jobs without poaching clients or going to work for competitors. Without these agreements, employers would hire fewer low-skill workers, they would require more oversight for employees on the job, trade jobs could be pushed behind high-cost education, and the flow of information within companies would be restricted.
Remember, the trades are competitive industries. Rival firms or interested clients can always offer to cover non-compete penalties. Employees under non-compete contracts can still leverage their way into better positions: It’s an employment contract, not a criminal statute. Some employees may celebrate if the FTC bans non-compete agreements — but future workers will pay the price.