by Benjamin Glasner and Kenan Fikri
The Government Accountability Office (GAO) report on the use of noncompete agreements (NCAs) released today provides new insight into the prevalence of NCAs and the self-reported reasons why employers use them. In general, the report’s findings underscore the excessive and relatively indiscriminate use of noncompetes in the labor market. Five points in particular stand out as important additions to the body of knowledge and evidence on the subject:
- Large employers use NCAs more than small businesses do.
- Employers rarely differentiate among classes of workers in their use of NCAs.
- Nearly all employers use trade secret protection as a justification for using NCAs.
- Employees are rarely offered anything in exchange for signing an NCA.
- Employers rarely enforce NCAs.
The GAO report both reviews prior research and offers new findings regarding the prevalence of NCAs derived from an original survey of private sector employers. While the survey is not generalizable to the economy at large, it provides important new evidence on how NCAs are used in the marketplace today. The report also includes an original survey on enforcement regimes with responses from 25 states and the District of Columbia, interviews with 27 stakeholders, and a review of the federal laws and regulations pertaining to NCAs. The general conclusions of the analysis fall in line with previous literature on the subject.
Let’s unpack the GAO’s core findings:
1. Over half of responding firms report using NCAs, and large firms use them much more extensively than smaller firms.
GAO’s survey found that 55 percent of responding employers (247 of 446) used NCAs for at least some of their workers. GAO’s estimates come in at the high end of those provided by the literature broadly. By comparison, Alexander and Shierholz (2019) found that 49 percent of private sector employers used NCAs for at least some of their workers, and 32 percent used them for all of their workers.
The GAO breaks the use of NCAs out across employer size, as shown in Table 1. Large employers with at least 500 workers are significantly more likely to use NCAs for at least some of their employees (64 percent of respondents) than smaller firms (41 percent) with fewer than 20 workers.
2. The vast majority of employers that use NCAs cover all of their workers with them.
The GAO report finds little evidence that employers distinguish between different types of workers once the decision to use NCAs has been made. The survey asked respondents whether all, some, or none of certain classes of employees were covered by NCAs. Among employers who use NCAs, 84.5 percent of them use NCAs for all executives, 70 percent of them used NCAs for all salaried managers, and 53 percent of them even used NCAs for all part-time employees. Only 28 percent of employers who use NCAs exempt hourly workers from them, according to the survey. In aggregate, these findings suggest that employers tend not to self-police or limit their use of noncompete agreements to only certain cases or employees.
3. Ninety-five percent of firms using NCAs claimed trade secret protection as a justification for doing so.
GAO’s survey found that the top two self-reported motivations employers give for using NCAs, if they use them at all, are 1) to protect trade secrets, intellectual property, and proprietary information, and 2) to protect client or customer contacts. Trade secret protection was the leading justification even among employers that had hourly or part-time workers sign NCAs. In the end, 95 percent of NCA users claimed they did so to protect trade secrets, including 88 percent of them who had hourly workers sign.
These figures suggest that employers tend to adopt an excessively broad understanding of a trade secret. In practice, the share of workers with access to sensitive and proprietary information that is legitimately and legally protectable is vastly smaller than the share of workers who are covered by NCAs. At worst, intellectual property protection may be advanced as a pretext for other reasons employers may less readily admit, including warding off recruitment (which two-thirds still admit to) or minimizing worker turnover (which only 34 percent of responding firms suggested was a motivation).
Most significantly, much more narrowly tailored legal tools exist to help employers protect both trade secrets and client lists, including non-solicitation agreements. More scoped protections can address discrete employer interests without the wide and indiscriminate negative ramifications on individual careers and the labor market that come with NCAs.
4. Signing NCAs is often a condition of employment.
In total, 87 percent of responding firms indicated that signing an NCA was a condition of employment and that workers received no additional consideration for doing it. This finding builds on prior literature debunking the idea that NCAs are negotiable and that workers come to the table with equal bargaining power. Employers that did offer compensation tended to do it more frequently for executives and salaried management than for hourly or part-time workers. Twenty-nine percent of employers that use NCAs for executives reported offering garden leave as part of the agreements, compared to only 18 percent for salaried non-managerial employees and 12 percent for hourly workers.
5. Most employers that use NCAs rarely or never enforce them.
GAO’s survey found that only 6 percent of employers that use NCAs report frequently or very frequently enforcing them. By contrast, 73 percent report rarely or never enforcing them.
This finding suggests that far more employers use NCAs than are willing to invest to defend them, revealing that they may be more motivated by the dissuasive “chilling effect” (the passive discouraging of workers seeking other employment opportunities by making them sign an NCA) than by protecting legitimate business interests. These findings build on other recent work suggesting that employers embrace NCAs because they can, not because they have to. Scholars have found no evidence that employers responded to Washington state’s new NCA laws by raising worker salaries above the eligible threshold so they could still be covered, for example.
Conclusion
In aggregate, the GAO’s report further bolsters the case for federal efforts to reform the use of NCAs. With state enforcement regimes growing increasingly divergent at the same time that NCAs themselves are being written to have ever wider geographic reach (according to the GAO’s stakeholder interviews, referring specifically to the rise of remote work), the need for federal intervention is growing. The responses employers provided to the GAO shed new light on how NCAs are used in the U.S. labor market – namely indiscriminately, as opposed to selectively – and reinforce the impression that the increasingly widespread use of NCAs stems from opportunistic behavior more than it does legitimate business needs. The report generally supports the case for broad action laid out in both the FTC’s proposed ruling on NCAs this spring and the bipartisan Workforce Mobility Act making its way through Congress.
