Biden Report Blames Non-Compete Agreements for Low Wages
Posted on Mar 31, 2022 on Employment-at-Will / Restrictive Covenants, Legal Updates by
A recent government report details how anti-competitive provisions by employers have decreased/suppressed wages by 20% or more for some workers (click here to read the full Report). The Report, which was a joint study by the Treasury, Justice, and Labor Departments and the Federal Trade Commission, claims employees win with greater competition between companies. The Report specifically identifies two of the most effective ways employers can limit competition: the use of non-compete agreements (agreements to block workers from taking jobs at rival employers) and, to a lesser extent, anti-poaching agreements (agreements to stop employers from hiring other employers’ workers).
The Report explains how non-compete agreements were originally designed to create protections of trade secrets, such as customer lists, proprietary technology or some business innovation or practice a company needed to protect. However, their use has expanded to now cover many low wage workers in the service sector who have nothing to do with trade secrets or other proprietary information. The Report illustrates how these types of restrictions can now be found across essentially all employment sectors and all levels of employees. In fact, studies show approximately one in five of today’s workers are under some form of non-compete, which is nearly double what it has been in the past. Additionally, businesses with multiple locations (think hotels, grocery stores, banks and QSR’s) are more likely to use non-competes, and these are the very businesses where low-income earners are found.
While it is true, a well negotiated non-compete can protect a company’s trade secrets and justify higher wages for top executives, it is also argued that non-competes reduce both wages and mobility for lower-income earners. This is because low-wage workers typically are not in the position to negotiate contracts for themselves and for those that do have the ability to negotiate, they generally lack access to competent legal advice that higher earners have.
The Report concludes many workers will be required to enter a non-compete agreement at some point during their careers. As a result, these low wage earners will find their career progression limited since their ability to find new employment in the same industry is limited.
A few years back fast-food chains like Arby’s, Jimmy Johns, Carl’s Jr. and others drew the ire of regulators, state’s attorney generals and the general public with their use of no-poach agreements. These agreement prohibit one store in a chain from hiring another store’s workers. One of the alleged effects of this practice was wage suppression. At the time, research showed that no less than 32 chains were using some form of anti-poaching provisions with their employees. Soon after the story made headlines, many of the chains removed their anti-poaching clauses; however, a recent study found approximately one in six service industry workers are still bound by some type of anti-poaching agreement.
Experts contend anti-poaching provisions imposed on low-income earners simply add an additional obstacle for these employees to overcome in their efforts to obtain higher wages and that it is an unfair restriction placed on them.
What Employers Can Expect Next
The Report is a direct output from President Biden’s Executive Order he signed in July 2021, where the President outlined 72 different initiatives to create a more “competitive economy.” One of these initiatives was a directive to ban, or at least limit, the use of non-competes in hiring contracts. The Executive Order did not impose an absolute ban on the practice itself but directed federal agencies to draft new rules limiting their use. This Report is viewed as the first step in that process as it encourages the FTC to use the agency’s authority “to curtail the use of noncompete clauses and other clauses that may unfairly limit worker mobility.”
Our readers will note that we have recently written about the use of non-compete agreements and the various state efforts to curtail their usage, especially as it related to lower-income hourly workers (Click here to see prior article on topic). Accordingly, one thing is for sure, whether federal action occurs first or not, government, both federal and state, is moving in the direction to limit these practices. Accordingly, we encourage all of our clients to take a closer look at how they are using restrictive covenants to further their business needs and ensure they serve a legitimate business need. If in doubt, seek competent legal counsel to help make this judgement.
Brody and Associates regularly advises management on complying with the latest local, state and federal employment laws. If we can be of assistance in this area, please contact us at email@example.com or 203.454.0560