Effects of using non-compete agreements in the Italian labor market

Lorenzo Luisetto, at present Doctoral Candidate at Michigan University, hosted at FBK-IRVAPP within the initiative “visiting research fellow” , on Thursday 113th July presented the results of the empirical study “The use of non-compete agreements in the Italian labour market”, to which also contributed Tito Boeri (Bocconi University, CEPR, IZA and fRDB) and ì Andrea Garnero (OECD and IZA). The study originated at first from the idea to investigate whether non-compete agreements are widely spread not only in the US, given that the American labour market, compared to that of other countries such as Italy, is flexible, dinamic and with a high turnover, low coverage of collective negotiation and prevalence of ”employment at will”.

We asked Lorenzo Luisetto some questions to better understand the main features and the use of non-compete agreements in the Italian labour market.

• What are the non-compete agreements?

“The non-compete agreements are clauses in the employment contract or separate agreements by which the parties agree to make sure that the employee, once the employment relationship ends, cannot compete with the company (former employer) for a certain period of time.  In most OECD countries such agreements are legitimate, under certain conditions, and justified by companies’ needs to protect their trade secrets. However, these agreements can generate distortions in the labor market.
From 2014, for instance, in the United States it turned out that non-compete agreements apply also to low-wage employers who are not committed to trade secrets.
This highlighted their use in anti-competitive ways and to limit alternative occupations and competition in the product market as well.
Varied legislation has been introduced in the United States to limit the use of these agreements, especially for certain categories of workers, for example when annual wages are below a certain threshold.”

• What has the empirical study highlighted with reference to the non-compete agreements and their use in Italy?

The non-compete agreement is not a new phenomenon, but it was always assumed it was restricted to some kind of workers such as managers or highly skilled workers, who could agree with the company on a certain economic treatment in exchange for certain restrictions. The non-competition agreement, in this case, represents an agreement between two parties who are both interested and who can benefit from it, because the worker is then able to re-employ himself even in another industry receiving some compensation in the meantime, and the company protects its legitimate interests on training investment and trade secret, since, in case the employment contract is terminated, the worker cannot switch to a competitor of the company. The problem that has arisen in recent years in the United States is that these clauses also often bind low-wage workers who do not have access to trade secrets. For these types of workers unlike others, such clauses have a negative effect instead because they limit occupational mobility. This trend highlighted in the United States is now also found in the Italian labor market.

The study also points out that workers are often very uninformed about the validity of these clauses and consequently suffer a constraint in their job mobility. This is certainly a negative induced effect since the labor market in Italy is very rigid and job mobility is already very low.

The use of non-compete agreements may change depending on institutional conditions, such as with respect to factors such as:

• The legislation for protection against dismissal 
• The high coverage of collective negotiation
• The more in-depth regulation of non-compete agreements
  

Italy has one of the most strict dismissal protection legislations of the OECD countries – hiring, firing and resigning are half of what they are in the United States (Bassanini and Garnero, 2013). Collective negotiation covers, at least on paper, all workers, however we find that it does not play a regulatory role in non-compete agreements. Legislation on non-compete agreements is found in the Civil Code (ART. 2125 c.c.) and provides: maximum duration of 3 years for ordinary workers and 5 years for managers, and there must be specific compensation for the periods mentioned. By the law, the agreements is certainly invalid when it lacks at least one of these minimum requirements set by the law. However, the company that uses illegitimate agreements in Italy does not receive any sanctions. In the United States, on the other hand, there is only the “reasonableness test”; there is no federal legislation but only state legislation, except in some states such as California where non-compete agreements are prohibited.

All in all, the final results of the study are the following ones:

• 16% of private-sector employees in Italy are bound by a non-competition agreement and 18% in the U.S.
• In many cases several clauses are used in combination with each other (E.g. Confidentiality and the fact that you cannot solicit former clients)
• On average, non-compete agreements are prevalent among high-profile male workers who earn more than 2,000 euros per month. However, non-competition agreements also bind workers who do not have access to trade secrets.
• In Italy, moreover, not all agreements provide for remuneration, and the geographic reach often varies significantly even though the Italian territory is the most widespread.

The result is that either about the 80% of non-compete agreements is illegal or that workers do not remember exactly the contents and clauses of non-competition agreements.”

• The empirical study showed that non-compete agreements can generate distortions in the labor market, thus limiting worker mobility. Are there any countermeasures at the political economy level that can help re-establish a competitive mobility regime in the labor market?

Of course, there are many policy options available, for example, in some states in the United States the use of these agreements is prohibited for workers whose wages do not exceed a certain threshold. The problem that emerges from this study is that, in many cases, companies tend to use these agreements, including them in employment contracts, even knowing that they are invalid or illegitimate, because they still have an effect on worker behavior.
Therefore, it becomes important that workers be informed regarding agreements and the possibility of their use, and that companies be given incentives to use agreements that are legitimate and also legally valid. For example, there can be a time interval before the worker can sign the covenants, as has been done in Colorado where the worker must wait at least 14 days before signing, to give them time to inform themselves regarding the content of the non-compete agreement they sign.
Reasoning about penalties for illegitimate clauses that render agreements invalid could also encourage companies to behave more appropriately in the labor market.

• All in all, in your opinion, are these tools adopted by companies a limitation to innovation and economic growth in the country?

This is the first descriptive study carried out in Italy, however, it is clear that, especially in certain sectors, workers who quit and, for example, want to create a start-up with ex-colleagues, would not be able to do so and so there are actually obstacles to innovation as well. Even a new company that wanted to enter a certain sector would struggle even if it had availability in terms of economic resources, because it could not hire skilled labor to compete with other companies.
From both a theoretical and practical point of view, therefore, there is this actual risk. In the United States, for example, historically there has always been a debate about the difference between the geographic areas of Boston, Massachusetts, versus California, and some have always argued that the competitive and innovative advantage of this last state was that in California these non-compete agreements never applied. So a driving factor in this area’s ability to innovate was precisely the fact that employees could not be bound.

• Are there any differences with other countries using such tools which influence the labor market?          Surprisingly, the trends in the Italian labor market are very similar to those in the United States, despite the institutional difference in the two labor markets. In Europe there have only been partial surveys that do not allow us to draw parallels between countries yet, however, we plan to extend our survey to other European countries and do other in-depth studies that will give us a more complete overall picture.