In March 2016, the Office of Economic Policy of the U.S. Department of the Treasury issued a report titled “Non-Compete Contracts: Economic Effects and Policy Implications.” According to the report, an estimated 18% of all workers, or nearly 30 million people, are covered by non-compete agreements. The purpose of the report was to determine the economic effects of non-competes.
According to the Department of Treasury, the benefits of non-competes are:
(1) Non-competes are sometimes used to protect trade secrets, which can promote innovation.
(2) By reducing the probability of worker exit, non-competes may increase employers’ incentives to provide costly training.
(3) Employers with especially high turnover costs could use non-competes to match with workers who have a low desire to switch jobs in the future.
The downside of non-competes includes the following:
(1) employees’ bargaining power is reduced after they sign non-competes, possibly resulting in wage stagnation;
(2) sometimes, because of non-compete constraints, employees are force to leave their occupations loosing the benefit of training and experience they had gained in their fields;
(3) reduced job turnover may lead to labor market stagnation;
The report concluded that non-competes are often used by employers in non-transparent ways:
(1) Many workers do not realize when they accept a job that they have signed a non-compete, or they do not understand its implications.
(2) Many workers are asked to sign a non-compete only after accepting a job offer. One lower-bound estimate is that 37 percent of workers are in this position.
(3) Many firms ask workers to sign non-competes that are entirely or partly unenforceable in certain jurisdictions, suggesting that firms may be relying on a lack of worker knowledge. For instance, California workers are bound by non-competes at a rate slightly higher than the national average (19 percent), despite the fact that, with limited exceptions, non-competes are not enforced in that state.
Non-Competes and Trade Secrets
Only 24 percent of workers report that they possess trade secrets. Moreover, less than half of workers who have non-competes also report possessing trade secrets, suggesting that trade secrets cannot explain the majority of non-compete activity.
Non-competes are common among workers who report lower rates of trade secret possession: 15 percent of workers without a four-year college degree are subject to non-competes, and 14 percent of workers earning less than $40,000 have non-competes. This is true even though workers without four-year degrees are half as likely to possess trade secrets as those with four-year degrees, and workers earning less than $40,000 possess trade secrets at less than half the rate of their higher-earning counterparts.
Available evidence suggests that workers with a low initial desire to switch jobs are not more likely to match with employers who require non-competes.
In some cases, non-competes prevent workers from finding new employment even after being fired without cause; in such cases, it is difficult to believe that non-competes yield social benefits.
State Enforcement of Non-Compete Agreements
States vary greatly in the manner and degree to which they will enforce non-competes.
In some states, non-compete enforcement is determined by statute, while in others it is determined exclusively by case law.
Some states refuse to enforce non-competes, or refuse to enforce non-competes that contain any unenforceable provisions (“red-pencil” doctrine), although a majority of states will modify overbroad non-compete contracts to render them enforceable (“bluepencil” and “equitable reform” doctrines).
Texas Non-Compete Agreements
In Texas, non-compete agreements are governed by a statute and must meet certain requirements to be enforceable. When drafted properly, they are enforceable. However, a lot of times, they are not drafted correctly, which means that they would not hold up in court. You can see my previous posts regarding Texas non-competes here, here and here.
The Report Recommendations
Employers should increase transparency in the offering of non-competes; use enforceable non-compete contracts; and provide “consideration” to workers bound by non-compete contracts in exchange for both signing and abiding by non-competes.
Takeway: According to the U.S. Department of Treasury’s report, non-competes and how they are being used by employers across the country present some problems for employees and the labor market in general. Considering that every 5th person is under a non-compete restrictions, these problems are wide-spread. Employers and employees in Texas will both benefit from reasonable and enforceable non-compete agreements.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.