As I promised in my previous post, this post will examine the role employee non-compete agreements — and the even more nefarious and hidden phenomenon known as no-poach agreements — play in the political assignment of civic freedoms.
Imagine it is 2013 and you are looking for a part-time job in retail food service to supplement your income. When you were a teenager you had worked in a local grill and despite the relatively low wages you had appreciated the schedule flexibility and the companionship of your co-workers. You figure that you could handle the responsibilities of a part-time shift manager at a place like that and earn enough to meet your budget goals.
Over the course of the succeeding decades most of the local fast-food joints have been put out of business by competition from national chains that now dominate in the nearby commercial district. “How much different can it be to work in a chain restaurant?” you figure, and submit applications to a number of them.
Eventually, you score an interview at the local Jimmy John’s sandwich shop. The hiring manager is impressed by your maturity and offers you a job with the encouragement that after learning the shop’s procedures you could easily advance to a part-time junior manager. “That’s the ticket!” you say to yourself and decide to take the job.
Ah, but! During the initial sign-up process you are handed the employment contract and — being the type of person you are — rather than assuming that the contract has all the usual legalese about at-will employment and prohibitions of various types of illegal behavior, you read start scanning through it until you hit the paragraph that says you agree not to work for any other establishment that makes and sells sandwiches within two miles of a Jimmy John’s shop while working for Jimmy John’s and for the next two years after the end of your employment. “WTF?” you say to yourself and tell the hiring manager, “I wasn’t expecting a restriction like this. Thanks for the offer but I’ll have to decline.”
You leave the shop with a sinking feeling after the hiring manager wishes you a cheery, “Good luck!” Over the course of the next few weeks you get similar offers from an Arby’s, a Subway, a Panera Bread, and a Jersey Mike’s. Guess what, they all had similar language in their employment contracts! You finally luck out at the local McDonald’s. This time the interviewer hasn’t painted such a rosy picture of an up and coming management position, but between relief that the employment contract doesn’t include a non-compete clause and knowledge that there are plenty of McDonald’s restaurants with potential management openings within driving distance of your house, you take the job.
As expected you learn the operations of the business quickly and within a few months receive multiple, albeit small, pay-raises. Anticipating that you will soon be a viable candidate for a management post you make a habit of watching the online management training videos offered by McDonald’s and practicing as much of their recommendations as possible for a team member.
Your McDonald’s has a bulletin board in the break room with a section on local McDonald’s job postings. Unfortunately for you, none of the jobs posted on that board are management-level. You’ve known since you started that a lot more McDonald’s job openings in your community are posted on McDonald’s website than show up on the bulletin board, probably because there just isn’t room to post them all.
You search the job openings on McDonald’s website for any part-time shift manager openings nearby and sure enough, a couple of McDonald’s in other parts of town have openings for a part-time manager, so you apply. After not hearing back about either position, two weeks later you make a follow-up phone call to the phone number listed on the application website to find out where you stand. You notice that both openings listed the same phone number. A human resources rep answers the phone. Here is the brief conversation:
“Based on your prior experience you are not a suitable candidate for either position. Thank you very much for applying.”
“What could I do to improve my chances for the next opening?”
“Your best bet is to apply for the positions posted on your local job board. Each McDonald’s franchise has its own hiring criteria and the franchise owners prefer to promote from within their own staff.”
You knew the franchise owners were your real employer, not McDonald’s corporation. The McDonald’s application website makes that clear as day. Each franchise makes its own personnel decisions. You now realize that the two locations with openings belong to a different franchise from the one that runs your location. You also realize that all the job openings posted on the local job board at your location are at locations run by the same franchise that runs your location. You are still puzzled by the human resources rep’s advice. It’s not like each franchise is allowed to have its own management philosophy. McDonald’s insists that managers at all facilities using its brand train for the same attitudes, procedures, and skills. Also, a preference for promoting from within isn’t the same as a law, but it is pretty obvious from their answer that trying to get hired for a position in that franchise was likely to fail. Yes indeed, time for another “WTF?”
Clearly, your options for turning this side-hustle work into a promising addition to the family’s income have narrowed considerably. I’ll bet you feel, not free, but trapped. What is going on here?
You have become a victim of two different schemes the retail fast-food industry has employed to reduce costs by suppressing the wages of their employees. You were confronted directly with the employee non-compete clause in the employment agreements you were asked to sign. The use of these non-compete clauses spread throughout the industry over the last few decades and only a few companies, such as McDonald’s and Chick-Fil-A, never used them.
But employee non-competes are just the tip of the iceberg. Franchisees and the owners of national fast-food chains have a common interest in keeping wage costs low. Enter the “no-poach” clause in franchise agreements. When someone bought a McDonald’s franchise, they agreed that they would not hire anyone employed by a McDonald’s run by a different franchisee. That would prevent a spiraling wage war between different franchisees operating in the same market. Nobody told you about this arrangement between McDonald’s and its franchisees. One reason is that they don’t have to. There are many other reasons, all colored green. Hence the person on the other end of that phone call giving you BS about why you weren’t suitable for the management positions. There was only one reason you weren’t suitable: you already worked for another McDonald’s franchise!
So, where did such arrangements come from? It’s not anything new. In the old economic arrangements that preceded western capitalism slaves, land-bound peasants, and Russian serfs were not free to take their labor elsewhere. Mercantilism and its successor, capitalism, allowed for more mobility for workers from backgrounds of modest means to improve their economic circumstances. In a later post I will provide much more detail on the improvements and dangers for most people in the rise of capitalism.
In the medieval guild system the master craftsmen who trained apprentices would attempt to limit future competition from their trainees by requiring them to practice their craft in another local market after their training was completed. In England the courts refused to honor these agreements due to systemic, persistent shortages in skilled craftsmen. This was an early victory for labor freedom.
By the time the Unites States gained independence the use of non-competes here was pretty rare, given that the English legal tradition of refusing to enforce them came over with the colonists. In the ensuing decades the country was just beginning the transition from an economy largely based on agriculture to early-stage capitalism. The new circumstances employers and laborers found themselves in prompted US state governments to reconsider their stance on “restraints on trade,” that is various contracts and arrangements that limited what could be sold or bought or who could work for whom. Non-compete and no-poach agreements are examples of “restraints on trade.”
“Wait,” you say, “why didn’t the US government regulate this?” OK, let’s revisit our high school civics and/or American history classes. As prescribed in the constitution, government in the USA operates under the federal system. The US constitution defines the limited roles and powers of the national government and leaves large areas of government action to be handled by the individual states. Employment contract laws fall within the jurisdiction of the states. State laws have varied in how they handle non-compete clauses ever since the country was established. A few states, e.g. California, have had near-absolute bans on employee non-compete contracts. Many more have allowed for them but under limited circumstances, with some states tending to enforce them in more cases than other states. Much of this variation arose in the course of the 19th century as states adjusted their contract laws to deal with the increasingly complicated relationship between growing companies and their employees.
For a number of reasons industrialization picked up steam in the years after the American civil war. During this period a number of companies grew to such a size that they began to dominate their industries across state boundaries, and their owners and/or executives often employed tactics to block competing businesses based in other states from gaining a foothold or challenging their market dominance. The increasing economic and political power accumulated by these “trusts” began to have such notable ill effects on the health of the economy and the well-being of the majority of American citizens that an alarmed Congress passed the Sherman Anti-trust Act of 1890.
In a later post we will examing the way the federal government has enforced this Act in the last 130 years to prevent or break up monopolies. The Act also made it illegal for businesses to make agreements with each other that would prevent other competitors from damaging the economic power of the businesses included in the agreement. A “no-poach” agreement is a prime example of this type of illegal activity.
In the 20th century non-compete clauses became an increasingly common feature in employment contracts for senior executives, sales managers and their teams, and highly-trained engineers, analysts, and technical workers. This makes some sense. An employee who has intimate knowledge of a company’s proprietary trade secrets and operational procedures, some or all of which make it an effective competitor in the market, could damage the company’s prospects if they take that proprietary information to a competitor or start their own company in the same business. Likewise, someone with intimate knowledge of a company’s clients could wean them away after departing to work for a competitor. Legally enforceable non-compete agreements are a relatively easy way to discourage employees from this type of behavior.
Many experts argue that non-competes are unnecessary in almost all cases, because the main arguments in favor of them can be addressed by other means, such as non-disclosure agreements and trade secret and patent laws. But we will leave further discussion about the status of non-competes for the top 10% of American earners to the high-priced lawyers who specialize in such affairs. Instead, we will concentrate on the naked obscenity of using non-compete and no-poach agreements to steal freedom and wages from low-wage workers.
By the mid-2010s non-compete and no-poach agreements had become widespread in sectors of the economy that employed large numbers of low-wage workers, e.g. hospitality and retail sales. I was unable to find much research on how these types of agreements spread to different sectors of the economy over the last several decades. This is partly due to the difficulties in obtaining good data on these practices. The federal Bureau of Labor Statistics, for example, didn’t even start collecting data on the prevalence of non-compete agreements until 2017 and that decision was motivated in part by a 2014 New York Times report by Steven Greenhouse on the effects of the burgeoning use of non-compete agreements among low-wage workers in Massachusetts.
Another 2017 New York Times article on the bad effects of no-poach agreements on the pay of low-wage workers moved intrepid state attorneys general in Washington, Massachusetts, New York and several other states to issue subpoenas to large companies operating in their state to obtain their franchising agreements. They discovered that many of these companies have no-poach agreements written into their contracts with franchisees. The attorneys general used this information to threaten or actually initiate legal action against the companies. For example, Bob Ferguson, the Washington state attorney general, and his team informed over 200 companies that had franchises in Washington state with no-poach agreements that unless the companies nullified the no-poach provisions in their contracts nationwide, the state of Washington would sue them. As of 2020 the state secured agreements with 237 of these companies to nullify the no-poach provisions in their franchise contracts. This informative and at time hilarious interview with Bob Ferguson by the Pitchfork Economics team is worth a listen.
Why did the companies come to agreements with the states rather than trying to fight them in court? Simple, no-poach agreements are clearly in violation of the Sherman Anti-Trust Act. The companies’ legal teams knew they had no leg to stand on and told senior executives so.
If no-poach agreements are clearly illegal, why did companies use them in the first place? The answer to this question is at least partly tied in with the answer to the question, “Why do companies include non-compete clauses in their contracts with low-wage employees?” Put simply, companies do this because they can get away with it. In both cases companies recognize the vast power advantage they have over low-wage employees and use these agreements to take away some more of the workers’ bargaining power. The workers don’t know about the no-poach agreements, so they won’t complain about them, and they don’t have the resources to fight a legal battle if they try to violate the non-compete agreement. The workers are cowed into staying with their current employer and accepting lower wages and significantly fewer opportunities to advance their careers.
The top executives and major shareholders of retail food service chains realized that if non-compete and no-poach agreements became the standard practice across the industry it would pretty much lock their front-line workers into their current positions or at most to promotions within the same franchise. Freezing worker mobility would not only reduce the employee turnover rate but it would also make it much easier for franchisees to turn down worker requests for more pay. These are the same people who worked hard to keep both the federal and state governments from raising the minimum wage. They benefited greatly from having society at large subsidize their workforce via programs such as SNAP, LIHEAP, and community food banks. They could retain their desperate, stressed workforce without increasing wages, let tax revenues and charity cover the difference, and have shareholders pocket the money that otherwise would have gone to workers.
This scheme works great when there is an excess of workers, but it creates real problems for franchisees when unemployment rates drop very low, as has been the case for a number of years now. When retail workers with experience can’t move between franchises or employers and there are not enough people on the sidelines available as new hires, positions go unfilled, forcing locations to reduce hours and/or services. Workers become more stressed and either leave or engage in theft or sabotage, and customers become irritated. For example, I had been a big fan of a local Wendy’s as a fast-food option due to the salad options on their menu, but after they cut back dine-in hours to a minimum and removed free wifi at all the Syracuse locations I visited, I stopped going altogether, haven’t been back for four years and don’t plan on eating at a Wendy’s ever again.
One possible solution to this problem would be to raise the number of unemployed people. These newly-unemployed would become potential candidates for the the open positions and sales would drop, easing the pressure to hire additional workers to provide full services. In the recent history of the US Federal Reserve they have resorted to raising interest rates when the economy becomes “overheated,” expecting that the economy will slow down. This usually results in people losing their jobs, which would “solve” the worker problem for our franchisees. I’ll have much more to say about how government action can best deal with situations like this in a later post.
The other obvious solution would be to start raising worker pay to retain and attract workers, but many franchises were already squeezed by increased costs for supplies, insurance, rent, etc, the fixed fees they were required to pay to the corporation, and the risk to revenue posed by raising prices. Some franchises raised both pay and prices. Some raised pay and took the hit to their own profits. Some decided to not raise pay and live with the consequences. Regardless of the franchisees decisions, the corporations have not adjusted their fee structures to help out franchisees.
Since economists began systematically researching the effects of these agreements on low-wage workers evidence has accumulated that worker pay is about 4-5% lower than it would be otherwise in states that enforce these agreements. That evidence has led some state legislatures to pass laws restricting or outlawing the use of these agreements. The federal National Labor Relations Board issued a new rule in 2023 that treats corporations and their franchisees as joint employers, now both subject to unfair labor practice laws. By the way, this action reverses a decision in 2020 under the Trump administration that basically freed corporations from any liability for unfair labor practices committed by their franchisees. (That little piece of information is meant for those of you who believe that “both sides do it.”) Regulators at the Federal Trade Commission have also issued a rule banning non-competes nationwide for almost all employees. This rule hasn’t gone into effect yet pending the outcome of lawsuits filed by the US Chamber of Commerce and others. Whatever ends up happening to that specific rule, it is clear that more and more governments in our country regard the use of non-compete and no-poach agreements against low-wage workers as an unjust deprivation of workers’ freedom.
In subsequent posts we will explore several other methods corporations, their major shareholders and their political and academics allies have used to enrich themselves at the expense of most of the rest of us. Some of these other methods have hurt working and middle-class Americans much worse than the use of non-compete and no-poach agreements. We will find people defending these methods in the name of preserving and protecting freedom. I hope that this post will help you be more critical of these defenders when they trot out “freedom” language.