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ILSR Joins Petition to Ban Non-Compete Agreements, Highlights Harm to Local Businesses and Entrepreneurship

Date: 20 Mar 2019 | posted in: Retail | 0 Facebooktwitterredditmail
To support new business creation, restore the rights of workers, and fight creeping market concentration, ILSR has joined with the Open Markets Institute and others in filing a formal petition calling on the FTC to outlaw these instruments of market control.

Until a few years ago, getting a job picking products out of bins at an Amazon warehouse required signing a non-compete agreement. Amazon insisted that even temporary workers sign these contracts, which barred them from working at any company that “directly or indirectly” competes with Amazon for a full 18 months after their jobs ended. Amazon dropped these onerous employment terms only after they were the subject of a story in The Verge in 2015.

As astonishing as it might seem to subject low-wage workers to non-compete agreements, Amazon is hardly alone in doing so. Once limited to highly compensated executive and technical roles in guarded industries, non-compete agreements are now widely used by corporations to limit the job options — and thus the leverage — of low-wage employees. Non-competes have become common in sectors such as food service, retail, and warehousing. Jimmy John’s has required its sandwich makers to sign them. WeWork has imposed them on those who staff its co-working spaces. Last year, the big commercial real estate firm Cushman & Wakefield sued a former janitor in one of its buildings for switching to a different job — in the same building.

All told, about 1 in 5 Americans in the workforce, is currently subject to a non-compete agreement. That’s nearly 30 million people.

Originally designed to protect the trade secrets of Medieval guilds, non-compete agreements have emerged in the modern era as a tool for large corporations to concentrate their power over both workers and markets. While it’s easy to see how non-competes harm workers — and, indeed, there’s ample evidence that they limit job mobility and depress wages — less obvious are the ways these restrictive contracts hasten market concentration and work to the benefit of the biggest corporations. Emerging research suggests that non-competes give large firms yet another way to hobble smaller competitors and take market share.

Today ILSR joined with the Open Markets Institute and other organizations in filing a petition that calls on the Federal Trade Commission to use its rule-making authority to put an end to non-competes. The FTC has the authority to do so under section 5 of the FTC Act, which charges the agency with enacting rules to prevent “unfair methods of competition.” The petition, which makes the case that non-competes harm competition and companies have other ways to protect their trade secrets, initiates a formal process within the FTC. The agency must, within a “reasonable time,” either act on or deny the petition and issue a written statement with grounds for its decision.

Here’s a brief rundown of how non-competes can undermine entrepreneurship and small businesses:

  • Non-competes entrench big corporations by allowing them to hoard workers and tamp down labor costs.

Recent research found that non-competes are used most frequently in the largest, “multi-unit” firms. Think: chains and other massive enterprises. These companies, due to their size, have more resources — money, knowledge, and lawyers — than any small business does to attract and hoard workers. This adds a monopsony edge to their power — that is, the ability to inhibit labor market competition and thereby lower their labor costs.

By locking in talent and curtailing the freedom of those employees who do leave, dominant businesses amass workers, expertise, and skills. And given that the agreements are used most frequently in well-capitalized industries like information and technology, this tends to further concentrate economic power and productivity in the hands of the country’s largest, most profitable corporations at the expense of startups and smaller firms.

  • Non-competes impede entrepreneurship and slow new business creation.

Non-compete agreements act as a kind of barrier-to-entry for would-be entrepreneurs by preventing workers from starting their own businesses. While new business creation and start-up rates are down for a host of reasons — including capital access, unfair competition, and unobtainable commercial rents — economic and social science research suggests there’s reason to believe that non-competes are a part of that equation, too.

Studies (here and here) comparing the growth of the technology industries in Silicon Valley and suburban Boston, for example, found that the rate of startups and spinoffs was much higher in California, which doesn’t enforce non-compete agreements. A “natural experiment” case in Michigan bears out a similar result: when enforced, non-competes locked workers in place, blocking them from starting new businesses while also limiting existing small businesses’ ability to recruit talent. Another study found that venture capital investment is weaker in places where non-competes are more strictly enforced.

By inhibiting new business creation, non-competes also have an effect on job creation. New and younger companies have been shown to create jobs at higher rates than incumbents. But non-compete agreements impede these young firms and thus have a dampening effect on employment growth. Reduced demand for employment in turn depresses incomes. One study found that tech workers subject to non-competes saw slower wage growth and had less mobility to start their own businesses.

  • Non-competes disproportionately impede entrepreneurship among low- and mid-level employees.

High-level employees subject to non-competes are more likely to have the means to negotiate, sue, or otherwise avoid the consequences of violating these contracts. Lower level employees don’t have that advantage. In states where these agreements are enforced, those employees who do manage to create “spinoff” firms within the same industries are those with “high human capital.”

People working low- and mid-level jobs ought to have the same freedom and opportunity. That means the freedom to leave a job and strike out on their own. As it stands, non-compete agreements discourage workers who might have winning ideas, but less wherewithal to hire a lawyer and negotiate their way out of a non-compete, from becoming entrepreneurs.

While some individual states have taken action to limit the use of non-compete agreements, the anticompetitive consequences of these oppressive restrictions call for federal action. The FTC has broad authority to limit unfair methods of competition, and non-competes constitute exactly that. To restore the rights of workers, spur new business creation, and fight creeping market concentration, we urge the agency to outlaw these instruments of market control.

Photograph: AlbertHerring/Wikimedia Commons

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Charlie Thaxton

Charlie Thaxton was a researcher with the Institute for Local Self-Reliance’s Independent Business Initiative in 2018-2019. He studied local economies, small businesses, civics, and their connection to social capital and wellness.