Dive Brief:
- Researchers found no evidence that including a noncompete agreement in an employment contract reduced the leakage of sensitive data “beyond what a standard nondisclosure agreement already provides,” according to research recently published in the Quarterly Journal of Economics.
- Notably, removing a noncompete agreement in a worker’s contract increased mobility between competing employers by between 36% and 52% and raised an employee’s total wages by between 12% and 17%. Moreover, workers didn’t negotiate over noncompete terms, and were not any more likely to agree to increased compensation if they were randomly offered a noncompete.
- The study found that when companies were transparent about adding a noncompete rather than hiding it in a contract, it became more difficult to attract workers. However, the workers who agreed to accept the terms of the noncompete were also more likely to violate that restriction.
Dive Insight:
Professors Evan Starr, Bo Cowgill and Brandon Freiberg, authors of the study, examined more than 14,000 job offers across two finance firms, one of the most extensive randomized studies ever undertaken on restrictive employment contracts, per the University of Maryland.
Despite attempts by the Federal Trade Commission to regulate noncompete clauses, “employers have argued that noncompetes are needed to guard trade secrets — and that workers would not agree to give up future job options unless they were compensated for it,” per the research of Starr and his colleagues.
Nonetheless, their findings contradict that narrative.
For one thing, many employees simply don’t read the noncompetes in the contracts, and “a substantial share remained unaware of the restriction until firms contacted them after employment,” the report said.
Even when noncompetes end up being unenforceable, such as in California, where the clause was legally voided in 2024, worker mobility was the same as when noncompetes were enforceable.
“In other words, the law doesn’t matter,” Starr said. “The presence of the clause alone changes behavior.”
The study found that by removing noncompetes, worker mobility substantially increased without any increased risk of trade-secret leakage. That finding suggests that NDAs on their own offer comparable protection to nondisclosures, Starr said. For that reason, companies should carefully weigh the perceived benefits of noncompetes against the potential for candidate dropoff and “the possibility that workers willing to sign restrictive clauses may also be more likely to violate them.”
Starr added that this research offered a potential blueprint for companies that want to evaluate other restrictive contractual terms, such as NDAs, training repayment agreement provisions, nonsolicitation clauses and no-poach agreements.
Last year, the FTC agreed to dismiss its appeals in two separate legal challenges stemming from its 2024 Biden-era ban on noncompetes. In a statement at the time, FTC Chairman Andrew Ferguson said the ban’s “illegality was patently obvious” and “would never survive judicial review.” Ferguson was one of two Republicans who voted against the ban when it was first up for approval.
