Restrictions on Worker Mobility and the Need for Stronger Policies on Anticompetitive Employment Contract Provisions

• Jurisdiction: United States,Federal,California
• Author: By Donald J. Polden
• Citation: Vol. 33 No. 1
• Publication year: 2023

RESTRICTIONS ON WORKER MOBILITY AND THE NEED FOR STRONGER POLICIES ON ANTICOMPETITIVE EMPLOYMENT CONTRACT PROVISIONS

By Donald J. Polden¹

I. INTRODUCTION

There is increasing concern in the United States about the difficulties that American workers are facing including concerns about limits on worker job mobility and how those limits affect workers' wages and compensation, employee benefits, and finding their next job.² Workers believe the challenges they face in changing jobs for better salary and benefits should be addressed so they have greater job mobility and opportunities for advancement. Workers are subject to restraints on job mobility across the spectrum of jobs, including those in executive-level positions as well as minimum-wage employees. Workers complain that they are not constrained in getting better jobs by their experience, training, or education but rather by their employers' policies and employment practices, especially their growing use of employment contracts with restrictive practices that limit workers' abilities to seek better work.³

This Article argues that California too should re-examine its laws concerning restrictive provisions in employment contracts and arrangements for their impacts on labor markets, job mobility, and wages. California is perhaps the most restrictive of states in prohibiting the enforcement of employer restraints such as non-competes. While current California statutory policy on non-compete provisions is seemingly clear, there is evidence that it is being evaded by employers who impose the noncompetition restrictions, even if unenforceable. California employers further restrain worker mobility through imposition of other restrictive provisions—such as no-shop clauses, no-hire provisions, confidentiality provisions—that are not explicitly covered by California's statutory policy against restraints on mobility but nonetheless are widely used to hamper worker mobility.⁴

[Page 128]

This needed re-examination of the state's policy to limit enforcement of such restrictions in the workplace coincides with a national awareness that such employment restrictions harm workers and employers and should be curbed or banned outright.

States have passed legislation to limit the constraints that employers impose on their workers that make job mobility more difficult or even impossible. For example, California, for more than a century, has legislatively proscribed enforcement of employer restraints on worker mobility, especially covenants not to compete.⁵ Similarly, Massachusetts and some other states have recently enacted legislation that curtails the use of non-competes except in narrowly specified circumstances, such as protection of trade secrets or commercial confidential materials.⁶Restrictive covenants are widely used in the United States and have been justified as necessary to protect employers' interests but, as many studies discussed below conclude, they often have the effect of impeding the ability of workers to move to another employer in the same line of work. But there is growing evidence that these statutory limits on use of employee non-compete provisions are not completely effective in preventing employers from imposing non-compete restrictions, nor for that matter in preventing employers from utilizing many other types of restrictive contractual provisions on their workers. For example, while California and North Dakota refuse to enforce employer non-compete provisions, an empirical study showed that a high percentage (approximately 19%) of those states' employers include non-compete provisions in their standard employment agreements.⁷Another study concluded that "[t]he use of non-competes is so pervasive that even volunteers in non-profit organizations, in states that do not even enforce them, are asked to sign away their post-employment freedom."⁸ Employment experts agree that there has been a dramatic increase in the use of non-compete clauses in employment contracts, including one research finding that those clauses are found in somewhere between 20% and 50% of all employment contracts, including those of minimum wage workers.⁹

Federal agencies also have been energetic in using the antitrust laws to prevent competitor-employers' collusive conduct that constrains workers' ability to move jobs, such as employer use of "no-poach" and "no-hire " agreements where they agree to not hire each other's employees.¹⁰In 2016, the federal agencies, the Federal Trade Commission (FTC) and U.S. Department of Justice Antitrust Division (DOJ), issued a strong guidance for human resources officers, including threats of criminal enforcement, to avoid collusive conduct that suppresses worker wages and job mobility.¹¹Recently, the FTC launched a rulemaking proceeding aimed at employer use of non-compete provisions in employment contracts.¹² The agency asserted the need for federal involvement in this area by noting the national economic effect of non-compete and other restrictive provisions in employment contracts. According to the FTC, more than one in five American workers (totaling about 30 million workers) are bound by non-compete clauses the effect of which is to lower wages for workers subject to the non-competes and to workers not directly subject to them but who are harmed nonetheless.¹³ The agency also contends that these contractual provisions harm other employers who would otherwise hire workers that are handcuffed by the non-compete provisions imposed by their current employer.¹⁴

Employer conduct that constrains worker wages and mobility have traditionally been evaluated under two legal regimes—one involving employment contract provisions traditionally reviewed under state contract law and the other involving anti-competitive conduct prohibited by federal and state antitrust laws. While seemingly distinct forms of analyzing worker restraints, recent cases, agency actions, and scholarly works are re-examining economic and business foundations of these employment practices and contract provisions for their competitive effects both in markets for labor and in industries where such restrictive provisions are common.¹⁵ With better understanding of the economic effects of use of restrictive employment practices on worker mobility, courts and legislatures are beginning to re-examine their policies and laws

[Page 129]

that permit employers to impose restrictions that inhibit or eliminate workers' job opportunities.

The first part of the Article discusses the current employment environment that permits employers to restrict the mobility of their workers through a broad range of restrictive employment conditions and terms frequently imposed by employers. The second part of the Article examines efforts at enforcement of restrictive provisions by employers and recent federal and state cases and law aimed at protecting worker mobility. The part also considers a revealing example of an employment situation in which an employer aggregated several restrictive contract clauses into one contract that stifled, and were clearly intended to stifle, workers' ability to seek employment in the industry. The case demonstrates how, often, employment contracts contain a bundle of provisions that limit what workers can do during employment and after and that cumulatively inhibit their mobility to the next, better paying job. The example concerns an industry specific type of employment agreement that is apparently widely used in the entertainment industry, the so-called "Hollywood contract,"¹⁶and the Article examines those contracts with an aggregation of restrictive clauses to determine their effect on labor competition in the industry.

The third and final part of the Article examines the normative implications of efforts to constrain employee job mobility in California. It considers the broader reaches of constraining employee mobility and suggests a regime whereby employers are permitted only narrowly-drawn restrictions on their workers' opportunities for job movement while also permitting employers to negotiate for greater workforce stability. The Article, following recent California Supreme Court holdings, recommends that California lawmakers provide clearer guardrails on restrictive covenants in employment relations and increase penalties for employer use of most restrictive provisions. It also recommends that lawmakers should strengthen courts' ability to review employer use of restrictive covenants for the likelihood of competitive harms under the state antitrust statute.

II. RESTRICTIONS ON WORKER MOBILITY: USE OF NON-COMPETE AND OTHER RESTRICTIVE PROVISIONS

This part of the Article provides a background on the history and legal rules of restrictive provisions in employment contracts and then considers the effects of restrictive employment contract provisions on labor markets. Restrictive employment covenants are generally considered to be restraints of trade and analyzed under a common-law reasonableness standard that evaluates their beneficial effects mainly from the employers who wish to control their labor. Until recently they have not been examined for their competitive effects in markets for labor, for effects in the economy and for concerns that their use actually impedes entrepreneurship and innovation.¹⁷ However, as the Article describes, that is changing.

A. POLICY PERSPECTIVES ON RESTRICTIVE EMPLOYMENT COVENANTS

The use of covenants not to compete traces its history to English common law which recognized that some restrictions on competition were appropriate when there were business justifications for the new buyer or former employer to be concerned about subsequent competition from the purchaser of his business or a former employee.¹⁸ These concerns led to the recognition of noncompetition agreements at common law. The principal concerns were two-fold: First, non-compete clauses were justified because the former employee or former owner will use trade secrets, goodwill, and special...