Why are Noncompetes Bad for Working Women?
Noncompete agreements create barriers to fair job opportunities and economic mobility for all workers, and have proven to be disproportionately harmful to Colorado’s working women– and most particularly for women of color.
CFI and WFCO have been policy partners for many years, and our shared commitment to reforming Colorado’s economic policies to promote equity at the intersection of gender, race, and economics makes for natural collaboration. While a strong body of research suggests that noncompete agreements are an anti-competitive practice that harms all Coloradan workers, we joined forces to examine this issue because we are particularly concerned about the impact of noncompetes on working women, workers of color, and Coloradans earning low wages.
CFI and WFCO strongly support the Federal Trade Commission’s proposed rule banning noncompetes for all workers, which would promote competitive labor markets and economic opportunity for all workers by filling existing gaps in state policies. There is still time to submit a federal comment using this template from the National Employment Law Project; comments can be submitted here and are due April 19th.
What’s a Noncompete? Why Have They Proliferated?
Noncompete agreements prohibit employees or contractors from sharing proprietary information or working with a competitor. They were intended to protect innovations in highly skilled or creative industries with trade secrets or intellectual property that was individually generated, but owned by the company. However, in recent years they have become ubiquitous across all fields and salary ranges.
The purpose of noncompetes in fields outside those with trade secrets or intellectual property concerns is questionable; they have locked employees into poorer worker conditions by diminishing workers’ leverage to seek out better opportunities or bargain for higher wages. Moreover, the fundamental intent of noncompetes, to protect a firm’s innovations, can be carried out through alternative policy remedies (such as nonsolicitation agreements), which accomplish the same goals without harming competition and creating racial and gender inequities.
A Patchwork of State Policies: States Like Colorado Leave Some Workers Unprotected
The FTC’s recently proposed a full-federal ban, which is a critical step forward if Colorado and the nation hope to close gender pay gaps, ensure fair competition and economic dynamism, and encourage entrepreneurship amongst women and other historically marginalized groups. The proposed rule would build on the progress that Colorado has already made by limiting the enforceability of noncompetes for workers making under $101,250.
However, states like Colorado still fail to protect women earning incomes over the determined threshold from the pervasive, chilling effects of noncompetes. This is particularly concerning since the most anticompetitive effects across industries occur at the high end of the income distribution, as a result of the higher propensity of these individuals to pursue entrepreneurship, particularly females earning higher incomes. A full ban would expand protections to those at the high end of the income distribution promoting female leadership entrepreneurial ventures and emerging industries in Colorado.
A full ban for all states is necessary, and making non-competes unenforceable under state law does not prevent the harms outlined above because even if it has no real standing in the court, most workers aren’t lawyers; signing away your right to seek out other opportunities has a chilling effect on labor markets. Even in states like California where noncompetes are not enforceable, evidence suggests that when workers sign them, they still perceive them as binding and cannot afford the risk and costs of litigation. One study shows noncompetes are still used in 45.1% of establishments in California, allowing businesses to pressure employees into not seeking out better opportunities with competitors.
Why Are Noncompetes Harmful?
1. They Exacerbate Gender and Racial Wage Gaps, and Have Explicitly Racist Roots
The wage gap that exists in our country is only further expanded by inequitable tools that hold women, and other individuals, back from being economically successful. The wage gap in Colorado is evidenced by a research brief released by The Women’s Foundation of Colorado (WFCO) in partnership with the Institute for Women’s Policy Research. It found that “the average earnings for women in Colorado who work full-time, year-round are 83% of men’s average earnings for full-time work.” Moreover, “the gender wage gap persists in sectors where women are the majority of the workforce and the gap is even wider in sectors where most of the workers are men.” Given that a paper published in the SSRN discovered that “higher (noncompete) enforceability diminishes workers’ earnings and job mobility…and…exacerbates gender and racial wage gaps,” it’s vital that this rule is passed to address the harmful nature of non-compete agreements.
Historical systems of gender, racial, and economic oppression have perversely impacted the ability of women, in particular women of color, and women with other marginalized identities to achieve economic success. A study conducted by NELP found that “banning non-competes would help alleviate racial and gender wage gaps because the underpaid workers who are most affected are disproportionately women and people of color.” In fact, Ayesha Bell Hardaway’s The Paradox of the Right to Contract: Noncompete Agreement as Thirteenth Amendment Violations asserts, “noncompete agreements for low-wage, unskilled labor are reminiscent of the Reconstruction Era’s wage-contract system that former slave owners used to exploit and subjugate African Americans.”
2. They Suppress Wages for Low-Wage Workers
Noncompete agreements harm all Coloradans by suppressing macroeconomic growth and productivity, depressing wages for workers of all income levels, and stifling entrepreneurship. A full ban of noncompetes results in higher wages for workers in states leveraging this policy to ensure fair, competitive labor markets. Hourly workers in Oregon saw a 2-3% wage increase on average after the state banned noncompetes.
3. They Discourage Female Entrepreneurship
When workers are bound by noncompetes, they are less likely to go out on their own and start their own business, and women are disproportionately discouraged from entrepreneurship when bound by non-competes. One study shows that noncompetes increase the risk of entrepreneurship; for women, this acts as a “sharper break on startup activity than for men.” The gender gap in access to venture capital was closing prior to the pandemic, but COVID put a damper on this progress, which makes it all the more critical to ensure policies break down barriers to diversity in entrepreneurship.
This is especially important for the economies of states like Colorado in light of the growing body of evidence showing that organizations with a higher percentage of women in leadership roles outperform male-dominated companies. Colorado, and in particular the Denver-Boulder region, has one of the highest startup-density rates in the country, meaning that our state is a growing hub for venture capital and new business. Simultaneously, only 5% of Colorado’s 122 public companies have a female CEO, and women’s leadership on corporate boards has stalled in recent years. Capitalizing on the growth of emerging sectors requires policies that support competition across industries and diverse leadership, not inhibiting female-led innovation.
Coloradan women are key in promoting sustained economic growth in our state, but our state’s newest revision of its noncompete statute does not reduce barriers to innovation for all women. Lower-wage women across our state cannot be legally bound by noncompetes under the current statute, which is critical to expanding entrepreneurial opportunities to lower-income women and women of color, who are starting businesses and creating jobs at high rates despite facing barriers to accessing startup capital. However, entrepreneurship is most prevalent at the lowest and highest income levels, and Coloradan women at the higher end of the income distribution can still be legally bound by noncompete agreements under current Colorado law.
4. They Are Anti-competitive, Creating Barriers to Shared Economic Growth
The evidence suggests that economic dynamism and efficiency across our state’s economy also took a hit due to the proliferation of noncompetes. Not only do workers bound by non-competes stay in their jobs 11% longer, with no offsetting increase in pay or satisfaction, but they also slow the pace of innovation and force workers to seek jobs in industries outside their fields of expertise. Noncompetes not only reduce knowledge leakage across firms, but also lead to the stagnation of industries by discouraging “within-industry spinouts” that spur competition and innovation.
Advancing shared economic prosperity in Colorado requires a strong workforce and policies that create opportunities for mobility and entrepreneurship. While noncompetes may have the original intention of promoting innovation, by protecting trade secrets or encouraging investments in workforce training, many economists have argued that other policy options, like targeted nonsolicitation agreements or copyright rules, are more efficient tools to encourage firms to innovate.
Scholars at Brookings have noted that by improving the ability of workers to switch jobs, policies banning noncompetes can produce both wage and productivity gains. It’s clear that the costs of noncompetes vastly outweigh their intention to protect trade secrets, which other policy approaches can more efficiently achieve. While Colorado’s existing statute has taken important steps to prevent noncompetes from suppressing dynamism and growth for low and middle-income residents of the state, a more robust federal ban would unlock our state’s full economic potential by dismantling unfair barriers to opportunity for all Coloradan workers and innovators, particularly female entrepreneurs and women of color.
Take action now; submit a federal comment using this template from the National Employment Law Project by April 19th. Comments can be submitted here.
