Non-compete agreements, or “non-competes,” are contracts that prevent workers from working for competing employers within a certain period of time after leaving a job. The primary purpose of these agreements is to protect a company’s private property and to encourage creativity by preventing workers with ‘trade secrets’ from transferring technical and intellectual property to rival firms. These agreements may also promote companies to invest in employee training, reducing concerns that workers will leave and take skills gained at one company to benefit a competitor.
In 2016 the White House released a report entitled “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses.” Citing the research of Norman Bishara, a professor at The Ross School of Business at the University of Michigan, the Report details the benefits of non-compete agreements and the economic risks of their overuse for employees. The Report notes that “In the large majority of states, non-compete agreements are enforceable for workers across all income brackets, and many states do not have restrictions around the geographic or temporal limitations of non-competes. Non-compete agreements are also prevalent in states where the courts generally do not enforce them. For example, in California, which does not generally enforce non-compete agreements, 22 percent of workers report that they have signed a non-compete. Survey research shows that many workers are not aware of the lack of enforcement in these states, suggesting that even unenforced non-compete agreements may have deleterious effects.”
The White House Report concludes that, “[i]n 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.”
The White House Report draws on a recently released report from the U.S. Treasury Office of Economic Policy, Non-Compete Contracts: Economic Effects and Policy Implications, which provides an overview of growing research on the prevalence, enforcement, and effects of non-compete agreements.
The White House and U.S. Treasury Reports can both be found below: