Rigged Labor MarketDespite a strong jobs report on May 3, 2019, wage growth continues to be a disappointment. See Axios post, “The Mystery of Sluggish Wages.”

I don’t have all the answers, but I can point to at least a partial explanation for this mystery; the employment market is often contractually rigged by employers using overbroad contractual restrictions to artificially suppress wages.

Offer Employees Better Compensation; Get Ready to be Sued.

My law firm was recently retained to represent individuals sued by their prior employer. They were sued for allegedly “violating” a broadly worded provision concerning the hiring of plaintiff’s employees. This restriction is similar to no-poaching agreements that have been the target of federal scrutiny.

Under the subject agreement, a former employee cannot for two years:

… directly or indirectly … recommend for hiring, solicit or attempt to solicit any [Company] employee for the purposes of leaving [Company’s] employment and working for any customer, competitor or business that is engaged in similar operations as the [Company].

Notably, this case does not involve any claims that confidential or trade secret information was used to solicit customers. Rather, the cornerstone of the suit seeks damages. Those damages, or so the story goes, were incurred because the plaintiff was “forced” to offer in the form of more compensation to retain certain employees. These employees were purportedly contacted about job opportunities by their former colleagues.

Non-compete Restrictions Have Legitimate Purposes in Business; Suppressing wages is not one.

As as an attorney, I frequently advocate for employers for protecting legitimate competitive interests, confidential information, and trade secrets. An important tool for this protection is using tailored non-compete and non-solicitations. When properly drafted and used, such restrictions serve legitimate business purposes.

But they can also be used for improper purposes. In this case, no company asset has been misappropriated. Instead, a cynical but accurate explanation for plaintiff’s lawsuit is that if the restrictive covenant had not been violated, the plaintiff could have continued to pay wages below market or not in line with the value the employee(s) who were allegedly solicited provided to plaintiff.

Proof for a Rigged Labor Market

As Alan B. Krueger, a Princeton economics professor described in an interview with Conor Dougherty of the New York Times puts it, this sort of use of noncompete provisions and other restrictive employment contracts create a “rigged” labor market in which employers “act to prevent the forces of competition.” See How Noncompete Clauses Keep Workers Locked In (5/13/2017).

The lawsuit we are defending was only recently filed. And there are several issues the plaintiff company will need to overcome if it were to “win” its suit, including responding to anticipated counter-claims. But the unfortunate reality is that Plaintiff has already won in that some individuals it sued have been let go from their new employer.

This also illustrates the other negative effect overaggressive noncompete litigation has on the economy; such restrictions impede employee mobility and prevent firms from growing their business by freely hiring experienced and successful candidates. In fact, the plaintiff is an established player in the relevant market with a highly successful and accomplished team, which went after the “new kid” on the block and its new hires. No doubt this strategy makes for good business strategy for plaintiff. But that does not mean it is good for the broader business economy.

Use this link to contact Michigan attorney Jason Shinn if you have questions about this article, Michigan non-compete law, or litigation enforcing or defending against non-compete claims. Since 2001 he has represented companies and individuals in drafting, negotiating, and litigating non-compete disputes.