Bundling Postemployment Restrictive Covenants: When, Why, and How It Matters

Abstract

We study the extent to which firms bundle multiple postemployment restrictions together and examine competing theories regarding whether bundling enables firms to capture value from employees. Using novel worker- and firm-level survey data on four postemployment restrictions (nondisclosure, nonsolicitation, nonrecruitment, and noncompete agreements), we argue and show that when firms adopt any restrictions, they tend to adopt only a nondisclosure agreement or all four restrictions. Consistent with bundling enabling value capture, workers bound by all four restrictions earn 5.4% less than workers with only nondisclosure agreements. In contrast, the same comparison shows that top managers have relatively higher earnings, consistent with value creation arguments. We provide evidence that bargaining power underlies these differential effects. Finally, we find that examining one restriction alone, as in prior research on noncompete agreements, yields different results from analyses that consider bundling, likely because of selection into the use of restrictions.