Non-compete clauses for workers: Will the EU follow the US lead?
As the US competition authority proposed to ban non-compete clauses in employment contracts, a conversation about the exploitation of market power by employers is slowly taking shape in Europe.
Non-compete clauses are clauses in employment contracts that forbid employees to go work for a competing firm for a certain time after the end of the contract
In early January, the Federal Trade Commission (FTC), the US competition authority, proposed a new rule that would ban non-compete clauses on their workers, calling it “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”
In a statement, FTC chair Lina Khan said, “the freedom to change jobs is core to economic liberty and to a competitive thriving economy.”
The FTC estimated that getting rid of non-compete clauses could increase wages by nearly $300 billion per year in the US, as companies would have to offer better deals to their workers in a more competitive market.
Asked to comment on the FTC’s proposal at a press conference on 1 February, the EU’s chief competition enforcer Margrethe Vestager said, “colleagues in the US have done quite an impressive work, they have made it a priority to look at labour market issues.”
But, turning her focus on the EU, she said, “we don’t see that many here.”
“If we did, we would definitely look into it.”
Two million Italians under non-compete clauses
However, there is no EU-wide data on the prevalence of non-compete clauses, which makes it difficult to prove or reject Vestager’s assertion that there were not many non-compete clauses in Europe.
One indicator that she might be right is that non-compete clauses are already outlawed or strictly regulated in some EU countries. In Belgium, for example, non-compete clauses are only allowed for employees with relatively high salaries if the employee gets compensated for accepting the non-compete clause, among several other conditions.
However, a recent study by Italian economists Tito Boeri, Andrea Garnero, and Lorenzo Luisetto suggest that anti-compete clauses could be more widespread in Europe.
Looking at the Italian labour market, the authors find that “about 16% of private sector employees are currently bound by a non-compete agreement, which corresponds to almost 2 million employees.”
While the non-compete clauses are more common among highly paid managers and professionals, the study finds that the clauses are also “relatively frequent among employees in manual and elementary occupations and low educated and lower earning ones.”
Often illegal, but still effective
Analysing the content of the non-compete clauses, the study found that a large share did not comply with the minimum legal requirements and was thus not legally enforceable.
“But that does not mean that they are not effective,” Tito Boeri told EURACTIV. The professor of economics at Bocconi University is one of the study’s authors.
“If the non-compete clauses are not enforceable, but workers think they are, companies will get what they want,” he said.
To him, non-compete clauses can be justified if important trade secrets are at play, for example, in top management positions, where such non-compete clauses are usually also financially compensated.
But if non-compete clauses become widespread, this reduces labour mobility and increases inequality by suppressing wages, according to Boeri.
Not only Italy
“In the EU, there is less awareness of the seriousness of the problem,” Boeri told EURACTIV, even though some studies show that Italy is not the only county with a high number of workers being held back by a non-compete clause.
A 2015 survey for the Dutch ministry of social affairs showed that 18.9% of Dutch employees were working under a non-compete clause. A 2017 survey among professional and managerial staff in Finland showed that 37% also had such a restriction.
While the EU’s competition chief said there were “not that many” in the EU as there were in the US, these percentages point to several millions of Europeans working under the restrictive conditions of an anti-compete clause.
“In Europe, antitrust authorities do not think this is a problem for them as they do not see the links between competition policy and the labour market,” Boeri told EURACTIV.
According to him, a laudable exception is the Portuguese competition authority. In a paper dedicated to the links between competition policy and labour markets, the Portuguese competition authority reviews the most recent empirical evidence on non-compete clauses, saying that they “are highly prevalent, identified in different compensation levels, and restrict labour mobility.”
While the clauses may positively impact training efforts by companies, “these clauses may have a negative impact on innovation through the decrease in start-up creation, namely spinouts, on venture capital financing and on the number of patents,” the paper points out.
Movement in the Commission
One of the problems in tackling this issue from an EU perspective is that, while the EU has substantial competencies in competition policy, labour policy is still mainly a national domain.
But there are signs that this may change as in October 2022, it presented new guidelines to enable collective bargaining for solo self-employed people.
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Later in the same month, Vestager criticised so-called “no-poach” agreements in which companies agree not to hire each other’s employees in a speech in Rome.
Asked about non-competes at a press conference on 1 February, she insisted on the differences between the European and American labour markets. But she also said, “if we see something [in Europe] about it, of course, we would go into it because it is important when the individual is impeded from taking the next job.”
In emailed comments, a Commission spokesperson told EURACTIV, “the Commission is actively looking into possible issues involving competition between undertakings in labour markets, e.g. wage-fixing and no-poach agreements.”
The spokesperson also said that the directive on transparent and predictable working conditions indicated “that employers may not prevent a worker from taking up another job elsewhere.”
As of August last year, member states must have transposed this directive into national law.
Parliament is getting interested.
Meanwhile, the European Parliament has also started to take notice, for example, in its annual report on competition policy.
In the first draft proposed by EU lawmaker René Repasi, the Parliament “welcomes the Commission’s willingness to take into account the effects on labour markets and wages when determining the anti-competitiveness of collusive behaviour.”
“I have exactly the approach of the US FTC in mind,” Repasi told EURACTIV when asked about the meaning of this paragraph.
According to him, more details will be added later in the draft report.
The new US approach of a more labour-friendly competition policy might slowly be finding its way into the EU.
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