Senators Release Report from Government Watchdog on the Prevalence and Economic Effects of Noncompete Agreements Amid Intensifying Federal and State Efforts to Restrict Use

On May 17, 2023, U.S. Senator Rob Wyden (D-OR) announced the release of a long-awaited report on the U.S. Government Accountability Office’s multi-year investigation into the use of noncompete agreements across the U.S. labor market. In announcing the release, Senator Wyden said that the GAO report “highlights the problems of noncompete agreements – particularly their impact on limiting workers’ fundamental freedom to change jobs,” and pledged to “fight tooth and nail for fair labor laws that protect workers and promote the creation of new businesses in Oregon and nationwide.”

In March 2019, Wyden and a bipartisan group of U.S. senators – including Todd Young (R-IN) and Marco Rubio (R-FL) – requested that the GAO investigate the prevalence of noncompetes in the U.S. and the effects of such agreements on workers and the economy as a whole. Their letter cited concerns that the use of these agreements had spread from highly technical fields into lower wage work, and that “large scale” use “could slow economic and wage growth, reduce productivity and competition in labor markets, and create significant barriers to entrepreneurship and innovation.”

Over the next several years, the GAO conducted an extensive investigation into the use and effects of noncompetes, including: their prevalence across the U.S., including for various types of workers; the factors influencing employers’ and employees’ decisions to enter noncompetes; the effects of noncompetes on the workforce and firms; and steps states have taken to regulate the use of these agreements. In addition to reviewing empirical studies produced on these subjects, the GAO surveyed 446 private sector employers and 26 attorney general offices about the use of noncompetes, and conducted interviews with other stakeholders, including worker advocates, employer groups, and researchers.

The GAO titled the report summarizing its findings: “Noncompete Agreements: Use is Widespread to Protect Business’ Stated Interests, Restricts Job Ability, and May Affect Wages.” The report’s key findings include:

• Noncompetes are widely used, especially by larger firms. The GAO’s survey of private employers found that over 55% of respondents (247 of 446) used noncompetes for at least some workers. Large employers with at least 500 employees were significantly more likely to report that they used noncompetes (64% of respondents) than small firms (41% of respondents) with fewer than 20 employees.

• Noncompetes are used for workers at all levels. The GAO found that private employers use noncompetes for all types of employees. Among surveyed employers that use noncompetes, 84.5% reported that they use these agreements for all executives, 70% reported that they use noncompetes for all salaried managers, and 53% reported that they use noncompetes for part-time employees. Only 28% of these respondents exempted hourly workers from noncompetes.  

• Employment is often conditioned upon entering a noncompete. Of surveyed private employers that use noncompetes, 87% of these firms reported that entering a noncompete was a condition of employment and that employees received no additional consideration for executing these agreements.

• The vast majority of employers reported that noncompetes were necessary to protect sensitive information, although such information was not accessible to most employees subject to these agreements. The GAO found that 95% of private employers that use noncompetes reported that they did so to protect trade secrets, clients lists, and other proprietary information. The surveys also indicated that most of these employers’ workers subject to noncompetes did not have access to this information.

• Most surveyed employers that use noncompetes rarely or never enforce these agreements. Only 6% of surveyed private employers that use noncompetes reported that they frequently enforce these agreements. Over 70% of these respondents reported that they rarely or never enforce them. The GAO suggests in its report that these responses indicate that employers may be more interested in the effect that noncompetes have on dissuading workers to seek out other employment opportunities than the utility of these agreements in protecting proprietary information.

• Enforcement of noncompetes may reduce job mobility, wages, and new business development. The GAO report references studies indicating that in the 10 states where courts are most likely to enforce noncompete agreements, workers experienced less job mobility, which, in turn, may have suppressed wages.  Other studies referenced by the GAO in the report suggest that enforcement of noncompetes may reduce entrepreneurship and the creation of new businesses, especially in the tech and science industries.

As covered extensively in this blog, the battle over the use of noncompetes has intensified in recent weeks. As we reported, earlier this month the FTC delayed a vote on its proposed rule restricting the use of noncompetes until April 2024 after receiving intense opposition from industry groups. Two weeks later, a bill was signed into law in Minnesota targeting noncompete agreements in the state.  And, as we covered, on May 30, 2023, the National Labor Relation Board’s general counsel circulated a memo setting forth her view that noncompete agreements for nonmanagerial and nonsupervisory employees violate federal labor law except in very limited circumstances. The GAO’s report represents yet another salvo in this ongoing campaign, one that is likely to bolster growing federal and state efforts to restrict the use of noncompetes by employers.