Study Finds that Non-Compete Agreements are Bad for Employees and the Economy
A recent report released by the Economic Policy Institute (“EPI”) is arguing in favor of prohibiting noncompete agreements after concluding that the increasing use of noncompete agreements may be contributing to rising wage inequality, stagnant wages, and decreasing job mobility. Relying on data from a national survey of private-sector businesses, EPI found that almost half of responding establishments required at least some of their employees to sign noncompete agreements.
Should noncompete agreements be prohibited? Do they stifle competition? EPI certainly makes a strong argument, showing just how dangerous noncompetes can be for workers and the entire American workforce.
The Growing Use and Abuse of Non-Compete Agreements
Noncompete agreements are commonly found in employment agreements or as free-standing agreements, prohibit an employee from working for a competing business or starting their own competing business within a prescribed timeframe and within a specified geographical area. While their use was formerly limited to executives and other highly paid employees, the use of noncompete agreements has spread into all industries and to all levels of employees, including minimum wage employees and those working entry-level jobs. As a result of employer overreach, some states have made significant efforts to eliminate or limit the enforceability of noncompete agreements.
Labor Market Trends
EPI began its report by highlighting two main trends in recent decades: (1) rising inequality and stagnant wages among all but highly paid employees; and (2) the decline in job mobility and other measures of labor market fluidity. While many factors influence these trends, evidence suggests that the increasing use of noncompete agreements may be part of the problem.
In terms of wage growth, workers often change jobs for a pay increase; when noncompete agreements limit mobility and competition, wages remain unchanged. Since noncompetes prohibit a worker from starting their own business or taking another job, there is a decline in dynamism in the national labor market. In fact, EPI noted that enforceability of noncompetes reduces the formation of new firms by 12% and is associated with an 11% increase in the length of time a worker remains at their job. Indeed, noncompete agreements are inhibiting workers’ individual growth and impeding competition between organizations.
Key Findings about Non-Compete Agreements
The EPI study made several notable findings that supported its conclusion and argument for the prohibition of noncompete agreements.
- Almost half of businesses use noncompete agreements.
Specifically, 49.4% of establishments reported that at least some of their employees were required to sign noncompetes; 31.8% of organizations indicated that all employees were required to enter into noncompetes (regardless of wages or duties).
Based on the available data, EPI was able to estimate that 27.8% to 46.5% of private-sector workers are subject to noncompete agreements. Based on the assumption that there are 129.3 million people in the private-sector workforce, that means between 36 million and 60 million private-sector workers are subject to noncompetes.
- Mid-sized organizations are more likely to have all employees sign noncompete agreements.
Establishments with 50 to 100 employees are less likely to use noncompete agreements than organizations with 100 or more employees. However, while larger organizations (1000 or more employees) are more likely to have legal counsel and sophisticated HR policies, mid-sized organizations (100–499 employees) are more likely to require all employees to sign noncompetes than both smaller and larger organizations.
- In the 12 largest states, 40% of establishments have at least some employees sign noncompete agreements.
The EPI study reviewed the use of noncompete agreements in the 12 largest states (including California and New York) and found that 40% of organizations in these states use noncompete agreements with at least some of their employees.
Shockingly, 45.1% of California establishments subject some of their employees to noncompete agreements even though noncompete agreements are unenforceable in that state. Why would California employers do this? They are relying on the fact that workers rarely challenge these agreements in court.
The EPI study notes that employees’ fears of being sued and pressure from employers causes workers to stay in positions regardless of whether the noncompete agreement is enforceable. This lack of mobility leads to lower or stagnant wages, and it stifles creativity and the development of new companies, products, and ideas.
- Significant use of noncompete agreements in business services and wholesale trades.
Seventy percent of business services and wholesale trade organizations use noncompete agreements. These agreements are used less in transportation, education, health services, and leisure and hospitality establishments.
- Noncompete agreements used more frequently at higher-wage workplaces.
While noncompete agreements are used more with higher-wage workplaces than lower-wage workplaces, 29% of establishments where the average wage is less than $13.00 use noncompete agreements for all workers.
Many opponents of noncompete agreements take issue with the use of noncompetes on lower wage earners arguing, in part, that organizations are not protecting legitimate business interests by limiting employment options for entry-level and lower-wage employees.
- Higher use of noncompete agreements with employees with higher education levels.
Noncompete agreements are used more frequently with workers with higher education levels, especially in organizations where employees usually have a four-year college degree or higher. In addition, 45% of establishments where the typical education level is a college degree or higher used noncompete agreements for all employees. Lastly, in 27.1% of organizations where the typical employee has only a high school diploma, noncompetes are used for all workers.
- Employers requiring mandatory arbitration are more likely to use non-compete agreements.
More than half (53.9%) of establishments have mandatory arbitration procedures. EPI concluded that employers using mandatory arbitration are more likely to use non-compete agreements.
Advocating Ban or Limit Non-Compete Agreements
In 2019, the Workforce Mobility Act of 2019 was introduced in the United States Senate, which would prohibit the use of non-compete agreements on a federal level; this bill is unlikely to pass. Regardless, many states have enacted their own legislation to address abuses of noncompete agreements, but this can be confusing and cumbersome for employers working in multiple states. In addition to legislation, the EPI suggested the Federal Trade Commission could prohibit noncompete agreements through regulation on the basis that it is an unfair method of competition. As of yet, no federal statute or regulation is prohibiting the use of non-compete agreements.
While organizations with high pay or higher levels of education are more likely to use noncompete agreements, these agreements are still common in organizations where pay is low, and workers have lower education levels. Due to the level of harm noncompete agreements have on employees and the overall workforce, the EPI argues that noncompete agreements should be prohibited.
Understandably, a business wants to protect its trade secrets and other legitimate business interests from competitors. However, it is difficult to rationalize why a noncompete agreement should limit certain employees’ mobility, and why organizations would require all employees company-wide to enter into these agreements.
Noncompete agreements can be nuanced, and it may be challenging to ascertain the true effects of the agreement until you are ready to part ways with your employer. Unfortunately, for some, noncompete agreements can be extremely crippling in terms of career growth.