On January 5, the Federal Trade Commission proposed a rule that would ban noncompete agreements for all workers in the U.S., which are employment terms that bar workers from joining a competing business or starting their own rival business for a set period after leaving a job. Though the rule faces legal challenges, if finalized it would benefit millions of food industry workers, helping to raise wages and unleash entrepreneurship.
Researchers estimate that one in six U.S. food preparation and service workers have signed a noncompete agreement as have one in five workers in the agriculture or hunting industry, based on a survey of nearly 67,000 workers. This means as many as 1.4 million food workers are potentially bound by a noncompete agreement, affecting low- and high-wage food workers alike. They’re particularly pernicious across fast food chains, but they also impact chefs, white-collar food service managers, food safety specialists, and many more.
Noncompetes rob workers of the power to freely move to different employers within an industry or line of work, entrapping workers in subpar jobs. They’ve been shown to hold down wages and wage growth, since workers cannot easily leave for higher paying jobs, leaving employers with less incentive to retain workers with raises or better working conditions. This has been particularly hard for fast food workers during the pandemic since many chains raised wages but workers stuck with a noncompete weren’t able to take advantage of higher starting rates. “This is yet another mechanism the industry uses to keep wages artificially low,” says Teo Reyes, chief program officer for the Restaurant Opportunity Centers United, who interviewed restaurant workers about their COVID experiences.
Economists at the FTC estimate that noncompetes suppress workers’ income by three to four percent, denying Americans a collective $250 billion to $296 billion. They’ve also been shown to contribute to gender and racial wage gaps.
The geographic restrictions of non-competes can also present an onerous burden, forcing workers to move for new work. One chef temporarily worked abroad to wait out a noncompete that prevented him from cooking at any restaurants in New York City for a year. A brewer in Iowa took a job 100 miles away and still got sued by his former boss because his noncompete prohibited him from working at any other brewers within 150 miles for two years. Even when employers do not, or legally cannot, enforce a noncompete agreement, the mere threat of a lawsuit can sufficiently deter workers from seeking local work in their field. These hassles not only disrupt lives and families but also stifle innovation by preventing restaurant and food business openings. One study linked increased noncompete enforcement with a 12% decline in new firm entry.
Employers traditionally justify noncompetes by claiming a quasi-property right to intangible benefits shared with workers, such as specialized training, trade secrets, and client lists. They argue that competitors can “free ride” on their investments in workers after hiring them away. However, employers can try to keep workers by improving wages and working conditions, while availing themselves of other legal tools such as trade secret law, intellectual property law, and non-solicitation agreements to deter employees from sharing proprietary information.
Others argue that workers should better advocate for themselves or bargain for something in exchange for signing a noncompete. But this line of thinking ignores employers’ power over workers. Even in tight labor markets, most workers have little choice but to accept a noncompete agreement when presented. Only 10% of employees negotiate over noncompete terms and a third are asked to sign a noncompete after they’ve accepted the job. Many workers understandably fear losing a job offer if they push back against a non-compete or try to negotiate its terms, says Reyes.
Because the common justifications for noncompetes focus on workers with highly specialized training or high-level secrets, many assume that they only restrict college-educated workers. But widespread use of noncompetes among low-wage food workers arguably put the latest campaign against the practice on the map.
In 2014, Huffington Post revealed that Jimmy John’s sandwich shop made employees sign a noncompete agreement barring them from working at any store within three miles of a Jimmy Johns that makes 10% of its revenue selling sandwiches for two years after leaving. Subsequent research and investigations revealed many fast-food chains used spurious claims about trade secrets and investing in employee training to prevent workers from going to other chains. A survey by the Economic Policy Institute found roughly 30% of workplaces offering less than $17 per hour required noncompetes.
Even more fast food workers are restrained by no-poach agreements in which franchise owners agree not to hire each other’s workers. In 2018 as many as 80% of fast food workers were affected by no-poach agreements. These agreements exist in a legal gray area and the FTC has argued they violate antitrust laws, but its noncompete rule does not cover no-poach deals. Other antitrust enforcers have challenged the practice, particularly the Washington State Attorney General who reached legal settlements to eliminate no-poach clauses nationally at 237 franchise chains. A 2022 economic study (co-authored by Open Markets chief economist Brian Callaci) found that wages at chains that removed no-poach agreements rose 3.3%, a promising indicator for the FTC’s proposal.
The Open Markets Institute, along with a coalition of labor organizations, first petitioned the FTC to ban noncompete agreements in 2019. The White House later encouraged the FTC to issue a rule banning noncompetes in a 2021 executive order. To do so, the agency revived its unfair methods of competition rulemaking authority, which it had not used in decades.
The move could launch a new era of unfair competition rulemakings, but it also presents legal challenges. Business interests and conservative lawyers argue that the FTC does not have the authority to issue unfair methods of competition rules. Republican commissioner Christine Wilson opposed introducing this rule and argued that it violates the new major questions doctrine established in West Virginia v. EPA, which gives courts a new way to challenge the scope of federal agencies’ authority. The Chamber of Commerce also said the FTC’s noncompetes ban was “blatantly unlawful.”
However, just because the FTC has not made an unfair method of competition rule for decades doesn’t mean that Congress never intended it to. When the agency adopted a new policy statement to explore unfair competition rulemakings, it cited ample legislative history and legal evidence that Congress intended for the agency’s work to go beyond existing antitrust laws to stop monopolies in their “incipiency” and set the rules for fair business conduct, serving as an independent, expert body “entitled to deference from the courts.”
