Lina Khan, Chair of the Federal Trade Commission, is sworn in before a House Judiciary Committee hearing on Capitol Hill in Washington, on July 13, 2023.TOM BRENNER/The New York Times News Service
Matt Malone is an assistant professor at Thompson Rivers University’s faculty of law in Kamloops, B.C.
On Tuesday, the U.S. Federal Trade Commission voted to ban non-compete agreements, which limit employees from joining competitors after leaving their job. The rule, like one recently enacted in Ontario, will help elevate the wealth and bargaining power of American workers, enhance prosperity and spur innovation.
The Canadian federal government should follow suit.
Although many employers talk about the economic risks of not having non-competes at their disposal, more innovative jurisdictions than Canada have banned non-competes for years, including California – the place where half of the software engineering class at the University of Waterloo moves as soon as they graduate. California has banned non-competes since 1872.
Tolerating non-compete agreements in federally regulated sectors, as Canada does now, contributes to industries such as banking, telecommunications and air transportation becoming less competitive. Non-competes, by their nature, prevent opportunities for employee mobility and reduce knowledge spillovers.
Of course, the federal government can always inject subsidies into these industries to spur innovation and competition. But a cost-free way to do so is simply to remove impediments to job mobility, letting individuals more easily compete against established actors.
Doing so also compels employers to create workplaces where workers actually want to work – offering things like better wages, employee ownership and attractive perks.
Instead, the federal government is allowing non-compete agreements to spread in many markets dominated by just a few big players.
Employment periods are also becoming shorter and more precarious than ever before. So it should come as no surprise that the Canadian age demographic most affected by these trends – young people – is the one most supportive of a ban on non-competes.
Non-compete provisions are almost always imposed by employers at the outset of an employment relationship, in circumstances usually characterized by an inequality of bargaining power. Coupled with many employees’ lack of comprehension about the consequences of these provisions, this power dynamic poses serious concerns about worker vulnerability.
Given these dynamics, too many unreasonable non-compete agreements go unchallenged – a phenomenon that only emboldens employers to push the envelope further.
For example, in 2014, Jimmy John’s, a U.S. sandwich shop chain, was discovered asking its storefront sandwich-making employees to sign non-competes that would prevent those employees from working at other sandwich-making shops.
All of this carries major societal costs. Researchers have already shown that today employees receive no premium for agreeing to a non-compete in an employment contract, wages rise in jurisdictions that prohibit them, and wages fall in jurisdictions that remove such prohibitions.
One seminal research paper argued years ago that California’s ban on non-competes was a “causal antecedent” to the rise of Silicon Valley.
Naturally, employers argue that unreasonable non-competes are already unenforceable. But the absence of a clear prohibition leaves doubt and fear in the minds of many. Uncertainty often requires parties go to court to determine whether agreements have any teeth.
These disputes over enforceability also place unnecessary pressures on an already backlogged judicial system – one where the federal government shows little interest in addressing the continuing crisis of judicial vacancies.
Employers also like to say such agreements are needed to protect confidential information and trade secrets. But Canadian law already protects those subject matters in many other ways, including through a sweeping criminal law passed by the federal government in 2020. Plenty of other civil remedies are also available.
These existing laws offer better protection for trade secrets than non-compete agreements. They also generate far fewer adverse effects for the public interest – because they tackle the ball, not the player. As we persist in accepting non-competes as part of the game, we shoulder the societal costs of that choice.
The federal government frequently emphasizes the importance of fostering innovation, addressing generational fairness and advancing the digital economy. Yet it has chosen to ignore a simple and cost-free way to help achieve all of these goals.
A federal ban on non-competes is long overdue.