Both the White House and U.S. Treasury Critical of Noncompetes

by Lee Gesmer on May 10, 2016

Early this month the White House issued a report titled, Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses. The conclusion of this 16 page report is as follows:

In some cases, non-compete agreements can play an important role in protecting businesses and promoting innovation. They can also encourage employers to invest in training for their employees. However, as detailed in this report, non-competes can impose substantial costs on workers, consumers, and the economy more generally. This report informs future discussions and potential recommendations for reform by providing an overview of the research on the prevalence of noncompetes, evidence of their effects, and examples of actions states are taking to limit the use and enforcement of unnecessary non-competes. There is more work to be done. 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. Researchers must continue to assess and identify promising policy reforms and the potential impact of those reforms including unintended consequences. Ultimately, most of the power is in the hands of State legislators and policymakers in their ability to adopt institutional reforms that promote the use and enforcement of non-competes in instances that appropriately weigh their costs and benefits and in ways that provide workers appropriate levels of transparency about their rights.

Among many interesting points made are the following:

  • Almost 1/6 of of workers earning less than $40,000/year are bound by noncompetes.
  • An estimated 37% of employees subject to noncompetes are asked to sign noncompete agreements only after accepting a job offer.
  • There is a correlation between noncompetes and lower wages.
  • Many workers who sign noncompetes do not understand the legal implications of these agreements.

. . . and much more. Read the full report here.

The White House report comes on the heels of a March 2016 report by the U.S. Treasury titled Non-compete Contracts: Economic Effects and Policy Implications. The Treasury report makes many of the same points, concluding:

Though non-compete contracts can have important social benefits, principally related to the protection of trade secrets, a growing body of evidence suggests that they are frequently used in ways that are inimical to the interests of workers and the broader economy. Enhancing the transparency of non-competes, better aligning them with legitimate social purposes like protection of trade secrets, and instituting minimal worker protections can all help to ensure that non-compete contracts contribute to economic growth without unduly burdening workers.

Legislation regulating noncompetes has been filed with the Massachusetts legislature every year since 2008, and is likely to be filed again this year. Hopefully, the state lawmakers will take the findings of these reports into consideration and, at the very least, take steps that will curb some of the more egregious abuses associated with noncompete agreements.

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