Why Are Fast Food Workers Signing Noncompete Agreements?

Heidi Shierholz is not a fan of noncompete agreements, which many employers require new hires to sign. The contracts prohibit employees who quit from taking a job at a competitor for a period ranging from months to years. Often the stated justification is to protect a company’s business strategies from being shared with a rival. Shierholz, the new president of the Economic Policy Institute, says noncompete agreements rob workers of leverage against their bosses.

“If you’re a nonunionized worker, essentially the only source of power you have is the implicit threat that you could quit your job and take a job at another place,” she told me. “You can absolutely see why an employer who wanted to milk everything they could from a worker would try to take away that power. That’s precisely what noncompete agreements do. They cut off that source of power.”

You may have signed a noncompete agreement yourself. As of 2014, 19 percent of workers at private, for-profit companies were bound by noncompete agreements and 39 percent had been bound by one at some point in their careers, according to an article published this year in The Journal of Law and Economics.

It’s hard to argue with Shierholz that noncompete agreements can harm workers. It’s harder to know what to do about them. Should they be banned or just restricted? Should the federal government or state governments be responsible for taking action? Should the agreements be controlled by legislation, or by regulation, or by court decisions? These are partly political questions and partly economic ones.

The most charitable view of noncompete agreements is that they can indirectly benefit workers by giving employers the confidence to hire them and invest in them through training, sharing of sensitive information and so on. In a letter last year to the Federal Trade Commission, the U.S. Chamber of Commerce wrote: “It is important to note that noncompete contracts are not unilaterally imposed on employees. They are contracts freely bargained for before or during a period of employment. The employee gains something valuable in exchange for the voluntary commitment.”

That can be true in some cases. Still, the Chamber of Commerce’s argument is a bit of a stretch. Typically noncompete agreements are presented to people to sign after they have already agreed to take a job for a certain wage or salary, leaving them with no power to push back. So they aren’t truly voluntary.

What’s more, a lot of the people who are being forced into signing noncompete agreements are low-wage workers who are not privy to trade secrets. Twelve percent of workers earning less than $20,000 in 2014 had signed noncompete agreements, according to the journal article. Not even the Chamber of Commerce stands up for noncompete agreements in low-wage sectors, writing this year that “a noncompete agreement used to make sure a fast food worker, making minimum wage, doesn’t leave to work across the street at a competing restaurant that is willing to pay more is very likely a problem.”

Banning noncompete agreements for low-wage workers is one of the few issues in Washington that garners at least some bipartisan support. Since 2019 Senator Marco Rubio, Republican of Florida, has sponsored legislation to protect entry-level, low-wage workers from noncompete agreements.

There’s less agreement on the need for a federal ban or near ban, as is called for in legislation co-sponsored by Senators Chris Murphy, Democrat of Connecticut, and Todd Young, Republican of Indiana. (Murphy says their bill would “narrow the use of noncompete agreements to include only necessary instances of a dissolution of a partnership or the sale of a business.”)

The Chamber of Commerce argues that a federal ban is unnecessary because noncompete clauses are already subject under antitrust law to “rule of reason” analysis, which requires courts to look at the facts to weigh the competitive effects of a contract against its anticompetitive effects. Where concerns go beyond antitrust, the chamber says, they should be judged by courts under contract law or “left to state legislatures.”

Shierholz and others say a ban is appropriate. Employers are adequately protected from rogue former employees by other provisions, such as trade secrets law, says Sandeep Vaheesan, legal director of the Open Markets Institute. If employers want to keep their employees from going to competitors, the best way to do that, Vaheesan says, “is to treat workers well, offer regular promotions and raises, instead of locking them down through these one-sided contracts.”

Contrary to Shierholz and Vaheesan, Russell Beck, a lawyer in Boston, says trade secrets law isn’t a complete substitute for noncompete agreements because “it’s very hard for an employer to know if an employee has taken information with them when they leave.” And employees may not fully understand what’s allowed and not allowed, says Beck, a founding partner of Beck Reed Riden, who has represented employees, former employers and new employers in noncompete cases.

In 2019, during the Trump administration, the Federal Trade Commission looked into adopting new rules against noncompete agreements, but the effort went nowhere. It’s gearing up again now that Joe Biden is president and Lina Khan, a fierce enemy of monopoly, is chair of the Federal Trade Commission. In July Biden issued an executive order promoting competition in the American economy. It encouraged the commission to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.”

It’s going to take awhile, though. Supporters of strong action, including people at the Open Markets Institute and the Economic Policy Institute, were hoping the F.T.C. would put out a rule for comment, building on its extensive data-gathering in 2019. Instead in August the commission merely began gathering fresh data with a docket “inviting public comments on contract terms that may be harmful to fair competition.”

California, North Dakota and Oklahoma have banned noncompete agreements since the 19th century. Beck, the lawyer in Boston, says that by his count, three-quarters of states have fiddled with their noncompete laws in recent years, most in the direction of restricting their use, though none going as far as joining the three states with bans.

In a little-noticed but important development, this year the Uniform Law Commission wrote a model law restricting noncompete agreements that state legislatures are free to enact. The law requires that employers give potential hires early notice of noncompete agreements and prohibits the agreements from being used with workers earning less than the average pay in a state. (A majority of workers earn less than the average pay because a small number of very highly paid people pull up the average.)

You would think that noncompete agreements would not exist in states where they are unenforceable. Wrong. Some employers in California, for instance, get workers to sign them anyway in hopes that they won’t realize they’re unenforceable, says Evan Starr, an associate professor at the University of Maryland’s Smith School of Business, who has become the go-to source for data on noncompete agreements. (Starr is one of the authors of the Journal of Law and Economics article.)

Employers are actually more likely to mention noncompete agreements to departing employees in states where they’re unenforceable than in states where they’re enforceable, Starr’s research found. Starr was an adviser to the Uniform Law Commission. One of the nice provisions of the model law: “An employer that enters a restrictive employment agreement that the employer knows or reasonably should know is unenforceable under this commits a civil violation.” Punishing that kind of trickery is a step in the right direction.

Elsewhere

China’s “Belt and Road Initiative” is a vast program to finance and build infrastructure projects around the world, cultivating influence with other nations along the way. But the hidden debt to China from the program is almost as big as the officially reported public debt, according to a report by AidData, a research lab at the Virginia university William & Mary.

Through 2017, Chinese lenders provided about $385 billion to various state-owned companies, joint ventures and special purpose vehicles for which sovereign governments could ultimately be responsible if the borrowers fail to repay, says the report. That compares to around $415 billion in reported public debt, says Brad Parks, executive director of AidData. Parks explains that it took four years and 135 people to collect the data set, which covers 13,427 Chinese development projects worldwide. “A lot is in the public domain,” he says, “but it’s highly decentralized.”

Quote of the day

“The fact that Germany has turned challenges such as the rebuilding after World War II or reunification into tremendous success stories makes me confident that this can be achieved again.”

— David Folkerts-Landau, group chief economist of Deutsche Bank (Sept. 27)

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