A Not-So-Free Market in Bad Jobs

One of the more perverse hallmarks of the current economic “boom”—along with persistently stagnant wages, rising personal debt loads, and a range of other less-than-encouraging economic indicators that do not make the headlines as often as the plummeting unemployment rate and the skyrocketing Dow—has been the steady proliferation in recent years of employee noncompete clauses. Agreements that effectively prevent an employee from quitting to take a better-paying job at a rival firm, noncompetes have been likened to a modern form of indentured servitude by no less mainstream an entity than the American Bar Association. And while they have long been a familiar feature of employment in high-wage environments like corporate boardrooms and research-and-development labs, today, nearly one in every five American workers is bound by a noncompete clause in his or her employment contract—roughly twice the number currently represented by a union. Most disturbing of all, the spread of these kinds of agreements has been most notable in the lower echelons of the labor market—in precisely those sectors of the economy that have accounted for a disproportionate share of recent job growth in the aftermath of the Great Recession.

. . . [N]oncompetes have been likened to a modern form of indentured servitude by no less mainstream an entity than the American Bar Association.

Take Amazon, the online seller that now threatens to supplant Walmart as the dominant actor in the retail economy. As of 2015, the company was requiring even temporary hires in its sorting and fulfillment warehouses—which employ close to two hundred thousand full- and part-time workers during peak shopping seasons—to sign contracts that included language prohibiting them from “engag[ing] in or support[ing] the development, manufacture, marketing, or sale of any product or service that competes or is intended to compete with any product or service sold, offered, or otherwise provided by Amazon.” Given how difficult it is to think of a product or service that is not “sold, offered, or otherwise provided by Amazon,” the potential extent of this employment restriction—which remained in effect for eighteen months after employees ceased to work for the company—was staggering, especially for workers most likely to be looking for a next job in the transportation and distribution sector. At the very least, it made for a more effective way of retaining workers than Amazon’s notoriously skimpy pay and benefits packages—which are so low that, in Arizona, one in three Amazon employees have been found to depend on food stamps to feed their families. Only after a reporter unearthed how the company was forcing even its less skilled and temporary employees to sign noncompetes did Amazon stop requiring them of hourly workers like those in its warehouses.

But as it turned out, Amazon was far from alone. As recently as 2016, employees at Jimmy John’s, a fast-food sandwich chain with more than two thousand locations across the country, were asked to sign agreements that they would not work for any “business which derives more than ten percent . . . of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches” located within three miles of a Jimmy John’s outlet. This ban remained in effect for a full two years after employees stopped working for the company. In Jimmy John’s case, it took former New York Attorney General Eric Schneiderman calling such comprehensive employment restrictions for low-wage workers “unconscionable” and launching an investigation into the company, before Jimmy John’s agreed to cease using them nationwide.

Likewise, an even more recent study of business practices at Burger King, Jiffy Lube, H&R Block, and more than 150 other major franchise chains—which today employ close to eight million Americans—found that nearly 60 percent require their franchisees to sign “no-poaching” agreements, which was up from just 35 percent as recently as 1996. These agreements ultimately have much the same effect as the noncompete clauses used by Jimmy John’s and Amazon. In one instance, a McDonald’s worker in Orange County, Florida found a job at another nearby McDonald’s that paid significantly more money, only to discover that the company-wide no-poaching agreement prevented her from being hired by the second franchise—unless, as she was told, her current employer agreed to “release” her. Similarly, a class action lawsuit filed last year by workers at Carl’s Jr. alleges that the fast food chain’s parent company, CKE Restaurants (whose CEO, Andrew Puzder, was briefly President Trump’s nominee for Secretary of Labor), imposes “illegal no-hire” agreements on its franchisees, to prevent more seasoned shift leaders from transferring to other stores that offer higher hourly pay.

. . . [A] recent study of business practices at Burger King, Jiffy Lube, H&R Block, and more than 150 other major franchise chains . . . found that nearly 60 percent require their franchisees to sign “no-poaching” agreements . . .

Employers contend that these kinds of agreements are intended to safeguard trade secrets and proprietary investments in worker training, and to prevent ruinous up-bidding in wages. But when the know-how being protected is burger-flipping and pita-wrapping, and the wages in question are barely at the legal minimum to begin with, it seems likely that there are other rationales in play as well. One, clearly, is the creation of a subclass of super-exploitable workers, deprived of even their most elementary right to quit and seek other employment, and compelled by threat of legal action to accept their lot in dead-end jobs. As one recent study discovered, workers who signed noncompete agreements after they had already begun a job were significantly less likely to receive information from their employers relevant to training and advancement opportunities after doing so, and reported significantly higher rates of job dissatisfaction, than did other workers. In industries where skills are particularly recyclable between jobs (like fast food and retail), noncompetes seem specially designed to curb typically high rates of turnover—to the benefit of employers and the detriment of workers.

In labor markets where there are fewer opportunities to switch jobs between firms, . . . wages can be nearly 20 percent lower than in less concentrated markets.

And while it is hard to determine the precise effect that noncompete and no-poaching clauses have on earnings, a growing body of economic research on “monopsony power”—or employers’ ability to use these and other anti-competitive practices to suppress wages—has concluded that there is a clear linkage. In labor markets where there are fewer opportunities to switch jobs between firms, another recent paper found, wages can be nearly 20 percent lower than in less concentrated markets. “Poorly educated workers who can command only low wages are at a greater-than-usual disadvantage” when confronted with these kinds of restrictions, observed another report put together for the Brookings Institution. Those workers, the report finds, may have less of an understanding of the details of their employment contracts, and are less able to afford the legal costs associated with challenging noncompete clauses if their employers elect to enforce them. Either way, the report’s authors conclude, “there is little doubt that shifting market power has contributed to income inequality, wage stagnation, and sluggish economic growth.”

As the full extent of the monopsony problem has come to light in recent years, public officials have begun to take action to try to rebalance the unfair playing field created by employers. In October 2016, the Department of Justice (DOJ) announced its intention to more rigorously enforce antitrust laws that outlaw “agreements among employers not to recruit certain employees or not to compete on terms of compensation,” up to and including pursuing criminal charges. And so far, at least, the DOJ seems committed to upholding that new commitment under the Trump administration as well. This past April, Trump’s Justice Department reached its first such settlement, with two rail equipment manufacturers that had “entered into pervasive no-poach agreements that spanned multiple business units and jurisdictions.” The settlement required the companies to nullify those agreements and to notify employees that such agreements were no longer in place. Accordingly, in the aftermath of the news, Proskauer Rose, one of the leading employer law firms, wasted no time in informing its clients that “employers and HR professionals should be aware that both civil enforcement action and criminal prosecutions of wage-fixing and no-poaching agreements are now a high priority for the antitrust enforcement agencies.”

Whether the federal government will take a similarly pro-active approach to regulating the abusive practice of noncompete restrictions in the low-wage economy remains to be seen. At this writing, all of the antitrust investigations thus far pursued by the DOJ have targeted high-skill, high-wage employers, like Apple, Google, and Westinghouse. In 2015, Congress briefly considered a bill that would have outlawed the use of noncompetes for workers making less than $15 an hour, but it went nowhere. In 2016, Illinois did pass a law prohibiting the use of noncompete clauses for workers making less than $13 an hour, and this past July, attorneys general in eleven states and the District of Columbia launched an investigation into the use of no-poaching or non-compete agreements in the fast food sector. (California has long banned noncompete clauses altogether, which has been a boon for Silicon Valley startups eager to poach talent). But in other cases, states have moved in the opposite direction: In Idaho, for instance, a law passed in 2016 moved the burden of responsibility onto employees covered by noncompete clauses to prove that a new job would not hurt their previous employers, rather than the other way around.

Eliminating employers’ ability to collude with each other to keep wages down and lock workers into dead-end jobs would . . . have beneficial effects for the overall health of the economy . . .

Progressive think tanks and legislators have begun to draft and introduce a range of new proposals for addressing the lingering weak spots in the economy. These legislative proposals include a federal jobs guarantee with strong labor protections and industry wage boards staffed with worker representatives. Eliminating employers’ ability to collude with each other to keep wages down and lock workers into dead-end jobs—through robust anti-trust enforcement as well as new legislation—would likewise have beneficial effects for the overall health of the economy, and would be especially helpful to those workers in the low-wage service economy who often face the most egregious forms of abuse. That many low-wage workers today, as signatories to noncompetes, find themselves trapped in an updated form of indentured servitude is one more reminder that the work of the post–Great Recession economic recovery is far from over.