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Non-Compete Agreements: Bad for Employees, Bad for the Marketplace

This May, the Obama Administration released a report analyzing the use of non-compete agreements in the American economy, potential issues arising from such use, and the effectiveness of various state responses. This analysis suggests that the misuse of non-competes at various occupational levels places an unnecessary burden on employees, consumers, and the economy.

According to the report, currently, 30 million American workers - 18 percent of the workforce - are subject to non-compete agreements, with twice that number of people indicating they have worked under a non-compete at some point during their career. The report also suggests that companies are not shy about trying to enforce these restrictions. for example, an other finding cited suggests that lawsuits brought by employers against former employees for breach of non-compete agreements rose by more than 60 percent from 2002 to 2013.

Alarming evidence used in the report suggests that There is substantial misuse of these agreements:

  • Roughly 30 percent of U.S. employees working under non-compete restrictions neither don't have a college degree or earn less than $40,000 annually.
  • Only 24 percent of workers report that they actually possess any employer trade secrets.
  • Those in engineering and computer-related jobs account for approximately 33 percent of workers with non-compete agreements, but personal services, installation, and repair jobs comprise 18 percent of the total number.
  • Conservative estimates suggest that 37 percent of workers are asked to sign a non-compete only after accepting the job, and many don't realize or understand that they're subject to such restrictions.

Based on these facts, the White House report concludes that "non-competes can reduce the welfare of workers and hamper the efficiency of the economy as a whole by depressing wages, limiting mobility, and inhibiting innovation."

The report focuses on how these restrictions can have a chilling effect on wages and employee mobility. When employees sign the agreements, their ability to negotiate compensation and overall bargaining power drops dramatically. Employees are prohibited from accepting job offers from rival employers or must risk exposing themselves to a potentially lengthy and expensive legal battle. In fact, research conducted by the U.S. Treasury Department reveals that stricter non-compete language translates into lower initial wages and wage growth. Again, because nearly one-third of workers under non-competes don't have college degrees or make less than $40,000, the result felt by individuals and families can be devastating.

What many don't understand is that non-compete agreements not only limit employee mobility, they also impede people's access to critical goods and services. The White House report specifically mentions the health care industry, where doctors, nurses, mental health professionals, and other providers are encumbered by non-competes-this can interfere with the patients' ability to receiving service and the expected quality of care.

Economic growth relies heavily upon the creation and flow of new ideas and innovations, growth that is stifled by the unnecessary barriers that non-competes have on the marketplace. I wrote about these unintended consequences two years ago in a New York Law Journal article. In that piece, I cited research that suggests the rise of Silicon Valley resulted from a "carrot" (the attraction of California's non-enforcement of non-compete agreements) and a "stick" (pro-enforcement laws in Massachusetts and other states that effectively drove talented human capital from Route 128 and other tech belts to the West Coast).

I argued then, as I do now, that New York City's Silicon Alley could enjoy or suffer the same fate depending upon the stance New York' legislature and courts take relative to the enforceability of non-compete agreements. Examples of other states studying worthwhile solutions are as close as New Jersey and Maryland, where bills have been proposed that would make non-competes unenforceable in the case of certain low-wage workers.

The White House report is clear in its message: times are tough for American employees - both in lower-paying jobs - and highly skilled jobs and limiting their current and future earnings with anti-competitive measures is, in and of itself, a dangerous policy, with risks to employees outweighing the benefits to their employers. When you also consider the negative effect that non-competes have on developments of patents and intellectual property, startups and new ventures, and high-paying jobs that fuel our economy, the dangers become even clearer.

In this video, I discuss non-compete agreements and other types of restrictive covenants and the burdens they place on employees.

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