From Prohibited to Potential: Entrepreneurs and Non-compete Agreements

Barbers, manicurists, and tailors could all be making less than $15 an hour working for an employer.

Yet these professions lend themselves to entrepreneurial ventures, either for the hope of finding greater financial success or for the independence entrepreneurship can provide, or both.

However, non-compete agreements might force these would-be entrepreneurs to wait a substantial amount of time before they are able to start their own businesses.

Without addressing the argument of what level of government non-compete legislation should be decided, a new bill introduced in the U.S. Senate would exempt low-wage workers from non-compete agreements.

The Mobility and Opportunity for Vulnerable Employees (MOVE) Act aims to ban non-compete agreements for all workers making less than $15 an hour, or the minimum wage in the area if it is higher than $15 an hour.

Background of Non-compete Agreements

Currently, 19 million American workers, or 12 percent of the workforce, are confined by non-compete agreements. Previous Growthology blog posts have explained the problem of finding the right equilibrium for effective non-compete agreements.

Non-competes were initially developed to help protect companies from losing their competitive advantage if employees left and took intellectual property and other valuable knowledge with them to competitors or formed a new business that would compete with their former employer.

However, workers in less obvious fields, including the fast food industry, along with florists, photographers, and camp counselors, have become subject to non-compete agreements.

The MOVE Act comes after news stories surfaced about businesses requiring their low-wage workers to sign strict non-compete agreements.

Some of these contracts prevent their employees, or former employees, from “working for a competitor…for two years following their tenure at the company.”

That severely constrains where former employees, or current employees working multiple jobs, can work. One estimate suggests “the effective blackout area for [a specific employee at a fast food company]…would cover 6,000 square miles in 44 states and the District of Columbia.”

Sponsor Senator Chris Murphy (D-CT), speaking about the bill, said:

“Non-compete agreements hidden in low-wage worker contracts deliberately trap these workers in low-paying jobs – and that’s unacceptable…I worked hard on this bill because I believe that if you’re making less than $15-an-hour, the government has a moral duty to stop companies from exploiting your hard work by preventing you from using your skills and experience to work your way up.”

A Waiting Game for Potential Entrepreneurs

When workers must wait two years after ending employment before starting their own business in the same field, their skills will likely atrophy and they will have to find a job in another field.

The difficult process would likely act as a disincentive for workers to consider entrepreneurship as a viable option.

As the Kauffman Foundation highlighted in a recent Policy Digest:

“Non-compete agreements also may exacerbate inequality. Wealthier individuals may be less severely economically impacted while they wait for their non-compete agreement to expire. However, those who cannot afford to sit on the sidelines are left with few options except those that provide opportunities not in their field or those with compensation below the skill level of the employee.”

An Opportunity for Economic Independence

Ewing Kauffman, the founder of the Kauffman Foundation, believed that entrepreneurship and education are two paths to achieve economic independence.

Entrepreneurship creates an opportunity for workers to move up the economic ladder.

It is a balancing act to protect the incentives for individuals to innovate, while also protecting the investment incentives and intellectual property of existing companies. Adjusting the policy levers to reach the optimal level of protection is not one step, but a process.

Policymakers need to bear in mind these two competing interests when developing policies that create a fertile environment for economic growth.

For more information on non-compete agreements, check out Kauffman’s Policy Digest: Rethinking Non-Competes: Unlock Talent to Seed Growth
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