Tuesday, May 16, 2023: U.S. Government Accountability Office Report Found Employers Use Non-Competes to Protect Confidential Information, But Rarely Enforce Them
Non-Competes Restrict Job Mobility & May Affect Wages, GAO Also Noted
Employers’ use of non-compete agreements (NCAs) is widespread throughout the United States to protect confidential business information and trade secrets, but employers rarely enforce such agreements, a new GAO Report found. In addition, studies the GAO cited concluded that NCAs restrict job mobility and may reduce wages and new firm creation. The 77-page Report is entitled “Noncompete Agreements: Use is Widespread to Protect Business’ Stated Interests, Restricts Job Mobility, and May Affect Wages.” The report follows the regulatory interest that both the FTC and the National Labor Relations Board have expressed to restrict noncompetition agreements in the employment context as we previously reported here.
Why Did GAO Issue This Report & What Did They Review?
Six U.S. Senators – Chris Murphy (D-CT), Todd Young (R-IN), Elizabeth Warren (D-MA), Marco Rubio (R-FL), Ron Wyden (D-OR), and Tim Kaine (D-VA) – commissioned the Report in 2019. The Senators asked the GAO to review the use and effects of NCAs. The GAO provided the Report to its “Congressional Requesters” on May 11, but the agency did not publicly release it until Tuesday.
For the Report, the GAO conducted a comprehensive literature review of empirical studies on the prevalence and economic effects of NCAs and then identified 31 studies that met its research criteria for review. The agency also analyzed responses from 446 private sector employers to a nongeneralizable survey on the reasons they use and enforce NCAs. Further, the GAO conducted a separate survey of state attorney general offices on state statutes related to NCAs; 25 states and the District of Columbia responded. Finally, the GAO also interviewed stakeholders, such as worker advocates, employer groups, and researchers, and reviewed relevant federal laws.
What Did GAO Find?
The GAO’s key findings were:
Employers’ Use of NCAs Is Widespread. Eighteen percent of workers were subject to NCAs, according to two recent nationally representative studies the GAO reviewed. One of the studies estimated that 38 percent of workers had been subject to an NCA at some time in their careers. Over half of the 446 private sector employers responding to GAO’s survey reported that at least some of their workers had NCAs.
Employers Subject Both Executive and Hourly Workers to NCAs. Studies and the GAO’s employer survey also found that several different types of workers are required to sign NCAs, including executives and hourly workers. For example, over 70 percent of the respondents that use NCAs and that employed hourly workers used NCAs for at least some of them. The following chart illustrated these findings from the employer survey:
NCAs Used to Protect Confidential Information from Competitors. Employers the GAO surveyed most often reported using NCAs to protect certain confidential information from competitors, regardless of worker type. Yet, several stakeholders GAO interviewed said that lower-wage workers generally do not have access to such information. Below is an illustrative chart:
Few Workers Negotiate Terms of NCAs. Evidence suggests that workers who sign NCAs often do so as a condition of employment, the GAO pointed out. Moreover, the evidence also suggests that few workers who sign NCAs negotiate the terms because they are unaware of what NCAs are, they want the job regardless, or the NCA is introduced after a job is accepted.
Employers rarely enforce NCAs. Most surveyed employers reported rarely or never enforcing NCAs in the past five years.
Employers that reported enforcing NCAs reported doing so for all worker types, though most often for executives and managers.
NCAs Restrict Job Mobility & May Reduce Wages & New Firm Creation. By design, NCAs limit workers’ ability to move from one job to another. The GAO stated that job mobility can be a significant source of wage increases for workers, as they find higher-paying jobs or leverage job offers to negotiate wage increases with their current employer. Inhibiting job mobility with NCAs thus may reduce future wages, as workers cannot freely seek higher paying employment opportunities or bargain for raises in their current job. On the other hand, studies suggest that by allowing workers and employers to commit to longer job stability, NCAs, in principle, may encourage employers to increase investments in human capital (e.g., through training). Such investments could, under certain circumstances, result in workers having longer tenures and higher wages in their current job.
State Law Impact. The GAO found that workers’ job mobility is reduced in states that are more likely to enforce NCAs, while state bans on NCAs for certain workers increased workers’ wages, on average. The studies reviewed by the GAO also showed that enforcement of NCAs may restrain the creation of new businesses, especially in the tech and science industries, because of the increased probability of litigation and greater costs of recruiting and hiring staff.
Furthermore, two of these studies the GAO reviewed found that even when NCAs are not legally enforceable in a state, NCAs reduce job mobility and workers with NCAs are less likely to search for new jobs. Studies also found that on average, NCAs lower workers’ earnings, though certain groups like executives may experience mixed effects. In addition, studies found that NCAs may discourage workers from starting new firms.
Of the 26 attorney general offices that responded to the GAO’s survey, six reported not having NCA-related statutes, three reported a statute that generally allows NCAs, and one reported a statute that generally does not allow NCAs. In addition, 16 reported a statute that allows NCAs, subject to certain provisions; for example, exempting workers who earn less than a certain wage from NCAs or requiring employers to provide written notice of an NCA to workers before they start a job.
FTC Involvement & Pending Proposal to Ban NCAs
The Department of Justice and Federal Trade Commission (“FTC”) provided technical comments on the Report, which the GAO incorporated, as it deemed appropriate. The FTC also provided a comment letter with additional context from its research on NCAs.
As readers know, in January, the FTC published a Proposed Rule that would: (1) prohibit employers (nationwide) from using non-compete clauses in their contracts with employees, independent contractors, and “volunteers,” and (2) require employers to rescind existing NCAs and actively inform workers that they are no longer in effect. The proposal would also make it illegal for an employer to represent to a worker that the worker is subject to an NCA where the employer lacks a good faith basis to believe that the worker is subject to an enforceable non-compete clause. Moreover, the proposed Rule would preempt all state laws providing lesser protections. The public comment period for the proposal closed on April 19 with almost 20,350 comments submitted. When the FTC first published its proposal in January, we discussed its provisions here. See also our related content here, here, here, and here.