labor rights

[OPINION] Non-compete clauses in employment contracts: Time’s up

Vincent Jerald Ramos
[OPINION] Non-compete clauses in employment contracts: Time’s up

Guia Abogado/Rappler

'Non-competes severely limit workers’ future career opportunities and increase job search length'

After multiple steps in the application and hiring process and despite numerous documentary requirements and onboarding seminars, job seekers anticipate the “contract signing” day — indeed, a milestone for any worker. For a handful of employment contracts in the private sector, non-compete clauses are staple provisions. Simply put, these clauses prevent an employee from Firm A to work for competitor Firm B for a certain period post-employment. The primary justification for the inclusion of these clauses is to protect the firm — protect it from “disgruntled” workers who may simply jump ship to Firm B and possibly reveal trade secrets; and protect it from “opportunistic” workers who, after being trained and invested in by Firm A, move to another firm that will benefit from their skillset. 

From all possible angles, non-compete clauses have protectionist underpinnings, and whether these are indeed necessary for firm growth is not definitively established in the literature. But these protections do not come without cost. Let’s look at a real-life example. Peter (not his real name), a fresh graduate from a top university in the country, accepted an offer for an entry-level corporate job and was asked to sign a contract with the following non-compete clause:

The employee shall not engage in a business in any manner similar to, or in competition with, the company’s or the company’s affiliated business during the term of his employment and for 24 months succeeding his tenure with the company.

While jurisprudence in Philippine labor law may offer insights as to whether this provision passes the test for reasonableness, it must be noted that the inclusion of non-competes per se is already likely to limit the choice set of workers as to the types of occupations and sectors they might want to apply for in the future. In other words, Peter will be less likely to apply to jobs in the same industries as the company AND the company’s affiliated businesses in the future even if wages and working conditions are better and despite the sector-specific knowledge he would have already accumulated by then.

This implicit harm of non-competes on career mobility, working conditions, and bargaining power has been growingly recognized in the academic literature in recent years. Last January 5, the US Federal Trade Commission proposed a federal ban on non-competes for employment contracts, taking off from the precedent set in California, North Dakota, Oklahoma, and Washington DC where non-competes have been banned state-wide. Why is this ban beneficial from a social and economic point of view?

  • Non-competes fully concentrate the benefits on firms and costs on workers.

Non-competes provide additional legal safety to firms that can rest assured that their workers will not work for a competitor in the future, potentially leaking trade secrets and business strategies. This “benefit” is enjoyed by the firm alone and all costs to non-competes are borne by workers. Non-competes severely limit workers’ future career opportunities and increase job search length, and generate unnecessary turnover costs because of the need for retraining. 

  • Non-competes dynamically reinforce and expand buyer power in labor markets.

Within specific occupational and geographical labor markets, non-compete provisions restrict the available supply of trained labor to competing employers, therefore increasing the buyer (monopsony) power of firms. Simply put, if a labor market is composed of Firms A and B and a former worker of Firm A cannot be employed by Firm B afterward, the effective labor supply in this market shrinks not because of ordinary market forces but because of Firm A’s ability to set these terms.

  • Non-competes are a disproportionate response to risks of information leakage and labor flight.

Proponents of the extensive use of non-competes may argue: “What about the welfare of the big rich firms?” Indeed, alternative legal instruments that protect firms’ trade secrets and are less harmful to workers are available. The use of non-disclosure agreements and the availability of intellectual property rights provide ample protection to firms without impeding competition in labor markets. Another argument by firms might be the risk of labor flight — that workers may simply jump to their competitors after having been trained and invested. This is the beauty of competition — firms will compete on wages and working conditions to entice workers to stay. 

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In light of these global developments shedding light on the harm of non-competes, the Philippines must follow and respond. The Philippine Competition Commission (PCC) has an array of tools at its disposal to investigate whether such clauses indeed harm individual career mobility within specific occupational and regional labor markets. The Department of Labor and Employment (DOLE) should spearhead data collection and stakeholder consultations to estimate the prevalence of non-competes. Finally, Congress should consider legislating a ban on non-competes as a way to sufficiently guarantee workers’ freedom of occupation.

While gainful employment in a country with a sizable labor market slack is worthy of gratitude (according to Donnalyn the vlogger), workers ought not to be bound by potentially harmful provisions imposed by firms in employment contracts. The predominant narrative in the Philippines has long been, “Let workers compete for jobs.” It’s high time for policymakers and regulators to proactively address power imbalances in labor markets and induce firms to healthily compete for labor. Cracking down on union-busting efforts, investigating horizontal wage-fixing and no-poaching agreements, as well as dismantling excessive minimum requirements for low-wage and entry-level occupations are ways to abate the harmful exercise of buyer power in labor markets. But a reasonable first step is a ban on non-compete clauses. –

Vincent Jerald Ramos is a PhD candidate at the Hertie School Berlin and the Humboldt University Berlin, focusing on the causes and consequences of labor market precarity. He is currently a visiting researcher at the University of California-Berkeley and has taught labor economics and economic demography at the University of the Philippines-Baguio. Views are his alone.

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