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Non-Compete Clauses Are Strangling Our Lowest Paid Workers

Employers say they protect trade secrets. But then why are they being used against janitors and fast food employees?

In 2017, Sonia Machado worked as a janitor for Cushman & Wakefield in New Hampshire. Her cleaning job could hardly be described as high-skilled, but when she left to work for a competing firm, the sprawling real estate services company sued her for violating a non-compete agreement she had signed.

Cushman argued that if Mercado did not abide by her non-compete agreement, the company would be “irreparably harmed, the extent of which cannot be readily calculated.”

While Machado’s case may be extreme, it is indicative of how business norms have further shifted in favor of employers and against the least skilled and lowest paid workers. Notable cases of absurd non-competes range from Amazon, which has used them against warehouse workers, to Jimmy John’s, which has sued the makers of sub sandwiches.

The proliferation of non-competes is one reason American workers have not received a raise even though the economy has enjoyed one of its longest expansions ever.

Non-competes are creeping into the entire economy, often hurting the least powerful workers the most. Today almost one fifth of the American workforce labors under non-competes. Nearly 40 percent of workers have signed one in previous jobs. Only four states—California, Montana, North Dakota, and Oklahoma—completely ban non-compete agreements.

In March, a motley collection of labor unions, economists, and antitrust advocates, most notably the Open Markets Institute, presented an urgent petition to the Federal Trade Commission to ban non-competes entirely. According to the petition, the non-compete agreements suppress workers’ ability to negotiate for raises, escape from unsafe or discriminatory workplaces, and start competing businesses of their own.

Senators Elizabeth Warren and Amy Klobuchar have signed a letter calling on the FTC to end non-competes: “We write to urge the Federal Trade Commission to use its rulemaking authority, along with other tools, in order to combat the scourge of non-compete clauses rigging our economy against workers.” On the other side of the aisle, Senator Marco Rubio introduced the Freedom to Compete Act this January, which would protect entry level workers from non-compete agreements that harm their ability to negotiate wages or seek other employment.

In defending non-compete agreements, employers sometimes argue that they protect trade secrets, helping companies to innovate. While it might be understandable for firms that earn most of their revenue from intellectual property to ask important employees to sign non-competes, is there any good reason to ask camp counselors, janitors, and personal care workers to do so?

These employment clauses are found in a staggering percentage of America’s largest fast-food chains that employ minimum wage workers. Chains including Burger King, Carl’s Jr., Pizza Hut, and McDonald’s used them until recently, only stopping its use after public pressure. These no-hire rules impact more than 70,000 restaurants—more than a quarter of the fast-food outlets in the United States—according to the late economist Alan Krueger of Princeton University.

Arguments about protecting intellectual property are absurd, considering that there are relatively few trade secrets involved in flipping burgers and taking orders. The reasoning, then, is simple: the fewer options workers have, the less freedom they have to find other companies that might pay higher wages. The function of these rules is to limit worker mobility and diminish their bargaining power for higher wages.

Indeed, non-competes only help firms that want tight control over employees. They are disastrous for workers’ wages. Non-competes are not unique to the fast food industry: they are frequently used in maintenance, health, and food services. Wages are much lower in states that enforce non-competes and wages are much higher in states that do not enforce them.

Most workers don’t even realize they are signing away their rights, as firms are not legally obligated to disclose non-compete clauses. According to a study by economists Matt Marx of the Massachusetts Institute of Technology and Lee Fleming of Harvard University, only three in 10 workers were told about the non-competes in their job offers, and in 70 percent of the cases they were asked to sign them after they had already accepted the offers and turned down alternatives. Half of the time, non-compete agreements were presented to employees on or after their first days of work.

Most workers don’t discover they have signed non-compete clauses until after they’ve left their companies, when their ex-employers threaten to sue them or their new employers. And although many non-compete agreements are too broadly written to survive a lawsuit, most workers nonetheless obey them rather than risk the expense.

Janitorial companies or fast food chains are not, of course, monopolies. They have plenty of competition, don’t provide unique services, and enjoy no patents. And in a tight labor market, workers should get raises. Yet by exerting control over workers with non-competes, these industries suddenly become monopoly buyers of one person’s labor.

Monopolies occur when there is only one seller of a good or service. Monopsonies are when there is only one buyer of a good or service. Non-competes give companies de facto monopsony power. Preventing workers from leaving their jobs in search of better opportunities only occurs in an environment where firms have all the power.  

In an economy not deformed by rent seeking, many firms would be competing equally for workers and would be incentivized to entice new hires with higher wages, better benefits packages, and few restrictions on their next career moves. But monopsonies make it easier for firms to keep wages stagnant. The classic example of this is a coal-mining town, where the coal plant is the only employer and only purchaser of labor.

It is an irony that non-competes are also covering janitors. When non-competes are too broad or unenforceable, in law, there is a concept that some courts refer to as the “janitor test.”

In Distributor Service, Inc. v. Stevenson (2014), a federal judge ruled that an overly broad non-compete was unenforceable. The court stated that the “bottom line is that the plain language of the Non-Compete Provision would prohibit [the plaintiff] from being an ‘employee’ of any entity who engages in ‘Competitive Business Activity,’ whether he is in sales, works as a janitor, or maintains the second employer’s lawn. Thus, it is overbroad and unenforceable.” Yet today, janitors and gardeners still face non-competes.

The FTC long ago lost its way when it comes to competition and freedom in markets. The FTC and DOJ are opposed to employers colluding not to poach workers, which is welcome, but it has so far done very little to limit senseless, overly broad non-compete clauses.

Since Sonia Mercado’s fight against Cushman & Wakefield received public attention, the real estate giant dropped its lawsuit. After Amazon’s non-competes with warehouse workers became known, the company removed them for all hourly workers.

Until the FTC bans non-competes, it is only the power of the press that works.

Jonathan Tepper is a senior fellow at The American Conservative, founder of Variant Perception, a macroeconomic research company, and co-author of The Myth of Capitalism: Monopolies and the Death of Competition. This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.