Non-Compete Agreements Unfavorable to Workers, U.S. Treasury Report Finds

In nearly every state, employers use non-compete agreements with the justification that these contracts can help protect trade secrets and reduce the probability of worker exits. At the same time, however, non-competes may impose a large cost on workers, whose bargaining power and future employment opportunities are reduced by the contract. New research from the Office of Economic Policy at the U.S. Department of Treasury evaluates the impacts of non-compete agreements and suggests that reform is needed in order to craft policies that best benefit firms, workers, and society as a whole.

Non-compete Contracts: Economic Effects and Policy Implications discusses non-competes and their justifications, details and effects of their enforcement, and potential directions for reform. Of workers in the United States, approximately 18 percent report they are currently working under a non-compete agreement, while 37 percent report they have worked with one at some point in their career, according to the report. Employees working under a non-compete agreement are widely distributed across education, occupation, and income levels.

The Office of Economic Policy’s analysis finds that oftentimes non-compete agreements are used in non-transparent ways. For example, many workers do not realize when they accept a job that they also are signing a non-compete, have little understanding of its implications, or are asked to sign a non-compete agreement only after they have already accepted a job offer, which limits their bargaining power.

In addition to impacting workers, non-competes also have an effect on the broader economy. To assess the economic impacts of non-compete enforcement, the authors of the report conduct a literature review and find that stricter non-compete enforcement is associated with both lower wage growth and lower initial wages. When workers are limited in the types of future jobs they can accept, startups and other firms located in an area may find it difficult to hire qualified employees, leading to potential worker-skill mismatches. Furthermore, although non-competes are often used to protect trade secrets, the proliferation of these agreements can limit the spread of innovation, according to the report. As noted by Bloomberg, the absence of non-compete agreements and the inclination of employees to move from company to company is often used as a major explanation for why Silicon Valley was able to develop into the notable industry cluster that it is. While knowledge sharing may not always be in the best interest of one particular firm, it can be conducive to growth in the regional economy.

Ultimately, the Department of Treasury’s analysis yields three broad recommendations in an attempt to mitigate the harms associated with non-compete agreements:

• Increasing transparency in the offering of non-competes, mainly by requiring firms to make contracts, as well as implications for future mobility, more noticeable to workers at the outset of an employment relationship;
• Requiring firms to provide “consideration” to workers bound by non-compete contracts in exchange for both signing and abiding by non-competes. This could take the form of a severance payment to a worker who quits in exchange for abiding to the terms of the non-compete, limiting the harm to workers and ensuring that firms retain the ability to protect their own interests; and,
• Encouraging employers to use enforceable non-compete contracts to limit the confusion associated with the agreements.

The report heavily utilizes the 50 State Non-compete Survey developed by Beck Reed Riden, a Boston-based law firm focused on fair competition law. Nearly every state enforces non-compete agreements to a certain extent, though the restrictions related to this enforcement varies across states. For additional information on how each state approaches noncompetition laws and applicable standards, the survey results can be found here.

Read the report here: https://www.treasury.gov/resource-center/economic-policy/Documents/UST%20Non-competes%20Report.pdf