Noncompete agreements have long been used by hedge funds and other asset management firms to keep key executives and portfolio managers from leaving and taking their best ideas elsewhere. Now these employment provisions are widespread in finance and other industries, according to a report released Tuesday by the Economic Policy Institute.
In a survey of private-sector U.S. employers, 49.4 percent said that they required at least some employees to sign a noncompete agreement — a clause banning individuals from working for or starting a competing business within a certain period of time after leaving their current jobs. Nearly a third of respondents reported that all their employees were required to enter into noncompete agreements.
These figures suggest that the use of noncompete agreements is “ubiquitous” and “growing,” according to the report, authored by Cornell University professor Alexander Colvin and Heidi Shierholz, policy director at the Economic Policy Institute. Based on the survey results, they estimated that somewhere between 27.8 percent and 46.5 percent of private-sector workers are now subject to noncompetes.
Finance, insurance, and real estate companies were among the biggest users of non-compete contracts, according to the report. The survey found that about 58 percent of these companies made at least some employees subject to noncompete agreements, while 35.5 percent indicated that all employees were required to sign them.
Hedge fund firms Brevan Howard and Citadel have engaged in legal battles with former employees over noncompete clauses. Institutional Investor reported in 2015 that Brevan Howard co-founder Chris Rokos had engaged in litigation against the firm to overturn an agreement preventing him from starting his own hedge funds for five years following his departure. They settled their disagreement.
The Wall Street Journal reported in 2009 that Citadel had asked a judge to temporarily shut down the high-frequency trading firm founded by former employees who had left earlier that year.
[II Deep Dive: Non-compete Agreements May Get Tougher to Enforce]
Investment professionals such as those employed by hedge funds are typically highly educated and well compensated. The average portfolio manager at a U.S. hedge fund expected to make around $1.4 million in 2018, according to II’s All-America Buy-Side Compensation survey.
However, the Economic Policy Institute study found that noncompete agreements are not limited to the most highly paid and skilled workers.
Among companies that typically employed workers with “some high school” education, 20 percent required all employees to sign noncompete agreements, while 32 percent reported that at least some employees where subject to noncompetes. For companies that typically employed workers with a high school diploma, these figures rose to 27.1 percent and 43.9 percent, respectively.
Noncompete agreements were also found to be in use at companies that paid average wages below $13 an hour. Among these companies, 29 percent said all employees were subject to noncompete clauses, while 37.9 percent said some employees were.
“Noncompetes limit competition among businesses and stifle workers’ wage growth — given that changing jobs is where workers often get a raise,” Colvin said in the Economic Policy Institute’s statement on the report. “The rise of noncompetes is likely an important contributor to stagnant wages and declining job mobility in the United States in recent years.”