Non-compete agreements are a lightning rod in the tech industry, with critics saying they stifle startups, and advocates saying they can be a useful tool to protect businesses. Now the White House is weighing in, and largely siding with the critics.
A new report, based on U.S. Treasury Department findings, examines the negative impact of these agreements. The White House says non-compete clauses, which prevent employees from taking positions at competing companies for a specified period of time, may be misused or overused in the job market.
According to the White House, misused non-competes can result in lower wages, reduced labor market dynamism, and stunted innovation.
“Noncompetes that stifle mobility of workers who can disseminate knowledge and ideas to new startups or companies moving to a region can limit the process that leads to agglomeration economies,” the report says. “Overly broad non-compete provisions could prevent potential entrepreneurs from starting new businesses in similar sectors to their current employer, even if they relocate.”
The report found that only 24 percent of workers and fewer than half the workers with non-competes say they know trade secrets.
The White House also contends that if non-competes were truly intended to protect trade secrets, they would be rare among lower-skilled employees. However, fifteen percent of workers without a four-year college degree and 14 percent of workers earning less than $40,000 per year have non-competes.
“The broad geographic and time scope of non-compete contracts can limit the mobility of workers in a long-lasting way, harming both the workers and the overall efficiency of labor markets,” the report says. “When lower-paid, entry-level workers are prohibited from taking related employment for some time, they may lack the necessary skills to apply for other jobs, weakening their prospects for future employment and even their labor force attachment.”
The Treasury department also discovered lower wages and wage growth in regions with stricter enforcement of non-compete agreements. That finding is in line with a famous Stanford paper from 1999 that correlates the success of Silicon Valley with California’s refusal to enforce non-compete agreements, Vox reports.
A debate in February between Chris DeVore, the Techstars Seattle managing director, and Michael Schutzler, the Washington Technology Industry Association CEO, exemplifies just how contentious this issue can be, particularly in states with thriving tech economies.
Critics of non-competes in Washington state have long been trying to bring the state law in line with California law. The most recent attempt, a bill that would have made any “unreasonable” non-compete clauses void, died in the state House.
Washington companies, like Microsoft and Amazon, frequently use non-compete clauses to prevent engineers and executives from bringing company secrets to competing organizations.
The White House, for its part, says that overuse or misuse of non-competes can be short-sighted. It calls for reforms on the clauses to promote a healthier economy overall.
“While not necessarily in the interest of an individual firm, more rapid dissemination of ideas and technology improvements can have significant positive impacts for the larger regional economy in terms of innovation, entrepreneurship, and attracting more businesses and jobs to a region,” the report says.