The No. 1 reason you should NOT sign your employer’s non-compete clause

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A new study looks at rise of non-compete agreements.

At least one quarter of all private sector workers are under non-compete clauses that can close off job prospects and stifle business competition, a trend that’s intensified in the past several years.

That’s according to Tuesday findings from researchers at Cornell University and the Economic Policy Institute, a left-leaning think tank, who say lawmakers need to ban the provisions.

The researchers surveyed a nationally representative sample of businesses and concluded anywhere from 27.8% and 46.5% of all private sector workers have signed non-compete clauses.

A 2015 study estimated 18.1% of workers had signed the non-compete clauses, which can bar workers from decamping for similar work at a competitor during a certain period of time.

‘Your employer knows you have no outside options.’

—Heidi Shierholz, the Economic Policy Institute’s senior economist

Businesses might also prohibit workers, like those in sales, from working for competitors or starting their own business in certain geographic areas.

Heidi Shierholz, the Economic Policy Institute’s senior economist, said there’s one big reason people should think twice before signing non-compete clauses: “Your employer knows you have no outside options,” she said.

That, she said, gives the company more freedom to withhold wage increases. Non-compete agreements are, she added, a “way for employers to grab power to suppress wage growth.”

Over half of the responding companies also had mandatory arbitration policies, which companies use to quietly resolve worker grievances away from courtrooms and juries.

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Non-compete paperwork is often included in a mound of other new-hire documents, said the study, which used 2017 responses from more than 600 companies.

Several factors explain the rise of the non-compete clause, said professor Evan Starr, assistant professor of management and organization at the University of Maryland’s Robert H. Smith School of Business.

Furthermore, sites, which offer legal templates for users, and make it easier than ever to write up a non-compete agreement, said Starr, who also studies these types of clauses.

Non-compete clauses protect trade secrets and proprietary information.

Non-compete clauses can apply to high-powered jobs in sophisticated industries where firms have proprietary information and trade secrets.

But they can also apply in jobs that require less technical expertise — something that critics say is an unnecessary disadvantage for low-wage workers.

The national sandwich-making chain Jimmy John’s caught heat in 2016 for making workers sign non-compete agreements. It stopped the practice under a settlement with the New York Attorney General’s office. (The company did not immediately respond to a request for comment.)

The new study said the clauses usually applied to higher paying jobs, but many lower-wage workers still signed non-compete documents. Almost one third (29%) of businesses with an average hourly wage of less than $13 had all their workers sign non-compete clauses.

Last month, Deutsche Bank DB, -0.21%   research revealed that 20% of workers with a doctorate degree were subject to a non-compete clause. The same percentage of workers with less than a high school degree also had non-compete agreements, the firm said.

29% of firms with an average hourly wage of less than $13 had these clauses.

Non-compete arrangements for employees won’t hold up in court in California, North Dakota and Oklahoma, Starr noted.

But workers need the time, resources and wherewithal to fight the case after they hear tough words from their employer. “Most cases don’t get to court. They usually end with a threatening letter,” said Starr.

In fact, 45% of the California-based companies participating in the survey said they used non-compete clauses with at least some of their employees, the Economic Policy Institute and Cornell research showed.

Outside of California, North Dakota and Oklahoma, there’s a mix of laws on when non-compete clauses are and are not legal, said Starr.

The laws sometimes say businesses can only use the non-compete agreements for jobs paying over a certain amount and sometimes it’s based on profession.

There currently isn’t a federal law that discusses the use of non-compete clauses, but that could change.

‘Most cases don’t get to court. They usually end with a threatening letter.’

—Evan Starr, assistant professor of management and organization at the University of Maryland’s Robert H. Smith School of Business

One bipartisan bill, the Workforce Mobility Act, would prohibit non-compete agreements except for certain scenarios, like trade secret protection.

The legislation is being sponsored by Sen. Chris Murphy, a Democrat from Connecticut, and Todd Young, a Republican from Indiana.

The Senate Committee on Small Business and Entrepreneurship held a hearing on the bill and the broader issue last month.

Senator Marco Rubio, a Republican from Florida, said during the hearing that the time had come for a federal law.

He commended Young and Murphy’s bill while also noted he introduced his own bill, the Freedom to Compete Act, which would ban non-compete agreements for lower-wage and entry-level jobs.

“I think perhaps there’s room to debate whether non-competes at useful tools for executives and other high level workers. People can debate that, I imagine, to some extent,” Rubio said.

“But the broad harm that non-competes have caused American working families is, in my view, beyond dispute,” he added.

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