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Economy

What Are Noncompete Clauses? Why Biden Wants To Limit Their Usage

SACHA PFEIFFER, HOST:

President Biden signed an executive order last week calling for new limits on noncompete agreements. By signing one, a worker agrees not to take a job at a rival firm within a certain amount of time after leaving their current employer. As many as 60 million workers have signed such agreements. Planet Money's Erika Beras takes a look.

ERIKA BERAS, BYLINE: Noncompete agreements go by a lot of names.

LAUREN AYDINLIYIM: You might hear them called restraints on trade.

BERAS: That's Lauren Aydinliyim, a management professor at Baruch College who researches these agreements, also known as...

AYDINLIYIM: Covenants not to compete or CNCs. Some people call them noncompete covenants so NCCs. Gosh, so many - restrictive covenants, agreement not to compete.

BERAS: Different names but pretty similar - a contract between an employee and an employer in which the employee agrees not to enter into competition with the employer by going to work for another company or starting their own company - and they've actually been around for a long time. The first documented noncompete legal case was in 1414. It involved a dyer - someone who dyes fabrics. Then in 1711, there were two bakers. One, who was renting space from the other, had promised the other he wouldn't bake in the area where they lived, but he did anyway. The case went to court.

AYDINLIYIM: This agreement was actually upheld, and the court ruled that this was primarily because both parties had received something in the exchange and that the agreement was reasonable and necessary and ancillary to a legitimate transaction. All this language sounds really familiar because a lot of this is what we still hear.

BERAS: It pretty much set the stage for noncompetes today, where employers are still worried about workers sharing trade secrets or client lists, and they're more common than ever. People move around more, don't stay with the same employer for decades. Since the mid-'80s, at least 25 states have made changes to the enforceability of noncompetes. Then there's the internet. Jonathan Pollard, an attorney in Fort Lauderdale, Fla., says it's made it easier to issue these.

JONATHAN POLLARD: You just go online. You get a template. You plug the names in. You've got a noncompete agreement.

BERAS: His practice has litigated hundreds of these cases. Right now his representation roster includes a security guard, a high school English teacher and a pest control technician.

POLLARD: The ax really falls the hardest on lower-income people.

BERAS: Because, says Pollard, there can be a chilling effect.

POLLARD: Companies are getting not just the benefit they get from litigating it or trying to enforce it. They're getting the benefit from just having it there because it scares people.

BERAS: Into not leaving a job for a better-paying job. They're pushing people to move from one career field where they have more experience into another. Lauren Aydinliyim says all that can lead to what's called a vacancy chain effect.

AYDINLIYIM: Employers may not be able to attract the right kind of talent because they're not able to find workers who want to come work for them because everybody else perhaps has signed noncompete agreements.

BERAS: And that can stifle innovation and lead to wage suppression, but there is an economic argument for having everyone sign a noncompete. An employee hired for a lower-skilled position could work their way up in a company, and trade secrets are valuable. Now they've just become something else to sign. Nine years ago, Lauren Aydinliyim was starting a job. In her paperwork was a noncompete agreement. She went to her employer.

AYDINLIYIM: I was like, you're asking me to sign this. I'm going to let you know it's not enforceable.

BERAS: They asked her to sign it anyway, and she did. For NPR, I'm Erika Beras.

(SOUNDBITE OF MOKHOV'S "GOLDEN WAVES") Transcript provided by NPR, Copyright NPR.