October 13th, 2016

In May 2016, the White House released the report “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,”[1] discussing the growing prevalence of non-compete agreements in employee contracts, their potential misuse by employers and the negative effects it may have on the economy.  The report is meant to provide a “starting place for further investigation of the problematic usage of one institutional factor that has the potential to hold back wages–non-compete agreements.”

The report connotes a change in attitude towards non-competes.  Certainly, the report acknowledges, non-compete agreements or “non-competes” in limited circumstances may be socially beneficial, encouraging innovation, protecting trade secrets and incentivizing employers to invest in its employees.  However, as the misuse of non-competes has expanded and research increased, the social detriment has become a pronounced concern, undermining the potential social benefits of non-competes.  For example, while the “main economically and societally beneficial uses of non-competes are to protect trade secrets…fewer than half of workers who have non-competes report possessing trade secrets.”

Over time, the use of non-competes has increased.  “Research suggests that 18 percent, or 30 million, American workers are currently covered by non-compete agreement.”  And the number of employees being sued for breach of non-compete agreements has increased 61% from 2002 to 2013.  Non-competes, commonly thought to be used selectively for high-wage employees with advanced training and “trade secrets,” have increasingly, and, the report suggests, inappropriately, been used for low-skilled and low-wage workers who are unlikely to posses any trade secrets.  “Approximately 15 percent of workers without a college degree are currently subject to non-compete agreements, and 14 percent of individuals earning less than $40,000 are subject to them.”  In a highly publicized example of the misuse of non-competes, a national sandwich chain required its employees to sign a non-compete, restricting their ability to work at other fast-food restaurants.

Furthermore, the report found that 37% of workers are asked to sign non-competes after having already accepted a job offer.  Meaning, that they are often not negotiated and the employee may lack awareness of the agreement’s implications.  Additionally, employers often write overly broad non-competes that are at least in part, if not entirely, unenforceable, instead relying on workers lack of knowledge about its implications and legal enforceability.   For example, in California, while the legislature has made non-competes generally unenforceable, workers are still asked to enter into non-competes at a rate slightly higher than the national average, creating a chilling effect on worker behavior.

Non-compete agreements also have a negative effect on the economy by restricting workers mobility and constraining wage growth.  Workers bargaining power is reduced as a result of non-competes and “analysis suggests that states with higher levels of non-compete enforcement see lower wages in general, and that wage disparities between high and low enforcements states actually grow as workers age.”  Additionally, non-competes reduces labor market dynamism, reducing workers ability to switch jobs within their industry, resulting in reduced compensation, atrophy of skills, and estrangement from professional networks.  Furthermore, in some states non-competes are enforceable even where the worker is fired without cause, thus preventing the ability of a worker to continue working in their occupation even when fired without cause, such as layoffs.

Several states have introduced or passed bills aimed at curtailing and restricting the use of non-competes.  For example, Hawaii and New Mexico have banned the use of non-competes in specific sectors.  Whereas, Oregon and Utah have limited the duration of non-competes.  Other states, like New Jersey, Maryland, Washington and Idaho have proposed bills that would render non-competes unenforceable for workers eligible for workers compensation or non “key employees” who are unlikely to have inside knowledge or trade secrets.

The report concludes by noting that non-compete agreements can be socially and economically beneficial in some cases, however, non-competes can cause negative effects on workers, consumers, and the economy generally.  Acknowledging there is more work to be done on the topic, “The Administration will identify key areas where implementation and enforcement of non-competes may present issues, examine promising practices in states, and identify the best approaches for policy reform.”

[1] https://www.whitehouse.gov/sites/default/files/non-competes_report_final2.pdf

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