It’s not just noncompetes—increased use of anti-competitive contracts has limited workers’ bargaining power and employers’ hiring power
During the 2019 legislative session, lawmakers in a number of states including Maine, Maryland, New Hampshire, Rhode Island, and Washington passed laws limiting employers’ ability to impose noncompetition agreements (noncompetes) on low and middle-income workers. Noncompetes have traditionally been used to protect highly confidential information or trade secrets, and the trend to restrict them is in part a response to outrageous examples of employer overuse of noncompetes to prevent very low-wage workers like sandwich makers and security guards and even no-wage workers like unpaid summer interns from going to work for competitors. These new laws are important steps to safeguard employees’ ability to move jobs and employers’ ability to hire qualified candidates.
Yet while noncompetes matter tremendously, they are only one part of a larger story about how anti-competitive contracts—sometimes not even disclosed to workers themselves—are negatively impacting workers’ wages and mobility in our economy.
As Dr. David Weil documented in his landmark book, The Fissured Workplace, as companies have grown increasingly more specialized, our workplaces have concurrently grown more fragmented. For example, during most of the twentieth century, a commercial bakery would have employed almost every person in the line of production and distribution: the workers on the assembly line, the delivery drivers, the custodians, the office staff, and the accountant. Today, many of those positions would be outsourced to employees of different specialized firms: the temporary staffing company, the logistics company, the janitorial company, and the outside accounting firm.
For each “fissure”—or layer of outsourcing—there are contracts with implications for workers’ job mobility. That same bakery likely has agreements with the firms with which it contracts that, in addition to setting out things like costs, may restrain their abilities to hire each other’s workers. These contracts are where terms like a non-solicit, no-poach, or a no-hire agreement would be found. And while agreements like these made between competitor employers clearly violate anti-trust laws, things get a little murkier legally when the employers are also contracting with each other to produce some product or deliver some service. For workers, however, these legal differences are basically immaterial: deals cut between employers can limit their job prospects and bargaining power —although workers rarely even know that they exist or have the resources to challenge them.
What does this look like in practice? Staffing agencies, for example, typically have a contract with each employer with whom they place temporary workers, requiring that employer-client to pay the agency a fee if it wants to hire a worker directly. While it’s reasonable to require some fee to compensate the agency for the costs of recruiting and hiring, the fees can be so high and charged for so long that they operate as de facto bans to direct hiring. A contract produced in litigation involving one large nurse staffing agency, for example, shows that the agency required hospital clients to agree that they would not hire temporary nurses directly for a period of one year and, if they hired a temporary nurse at any point after that, the hospital would be charged 30 percent of that nurse’s annual salary. Costs like these help explain why, while most workers take temporary jobs hoping that they will serve as a bridge to permanent employment, only around seven percent of temporary help jobs actually result in a hire by the client-employer.
Staffing agencies may also agree not to hire each other’s workers when they contract with each other, for example to supply additional staff in case of a shortage. In a currently pending anti-trust case, that same nurse staffing agency, AMN Healthcare, was sued by a competitor who claimed that it used subcontracts to bar other agencies from soliciting or hiring its temporary nurses. What was the impact on the nurses? Not only did they face huge obstacles to being hired directly by a hospital, they couldn’t even go work for another staffing agency. They were effectively stuck.
These types of contractual restraints aren’t just found in temporary staffing. There are numerous examples of analogous agreements in franchising. Unbeknownst to their workers, fast food chains like Carl’s Jr, the car mechanic chain Jiffy Lube, even tax preparers like Jackson Hewitt, entered into agreements with their franchisees that they would never hire each other’s employees. Imagine a fast food cashier who applies for an open manager position at another store owned by a different franchisee, or a car mechanic hoping to work at a location closer to home. Again, because of contracts they never saw and did not agree to, these employees would have essentially no chance of getting the job. (More than 60 different corporate franchises that formerly engaged in these no-poach practices have since dropped them after being investigated or sued the Washington State Attorney General, among others.)
On an individual level, restraints like these harm workers who are trying to build a career or a better life for their families. After all, a viable threat of leaving for a better job is how many of us ever manage to get a raise or improve our working conditions. Taken in the aggregate, as scholars like Alan Krueger and Eric Posner have pointed out, these restraints may help explain why wages aren’t rising higher in a tight labor market.
Policymakers taking positive steps to reign in overuse of noncompetes should turn their attention to other contract restraints that function like noncompetes or worse. A new law in Maine, for example, is unique in that it doesn’t just limit noncompete usage; it also bans all “restrictive employment agreements.” Any agreement between two or more employers that “prohibits or restricts one employer from soliciting or hiring another employer’s employees or former employees” is now illegal in Maine. Other states should consider following suit or, at the very least, requiring affected workers to be informed when two firms enter into a contract that impacts their ability to change jobs.
In our increasingly fissured workplaces, employers routinely bargain away workers’ job mobility in contracts the workers have never even seen, let alone agreed to. It’s time to recognize the profoundly unfair and anti-competitive harms of these practices and put an end to them.