Employers can mistreat their workers in many ways. An employer might pay its workers substandard wages or force them to work overlong hours. It might coerce its workers into signing noncompete agreements or TRAPs that prevent them from leaving their current job or finding a new one. It might surveil, discipline, or discharge workers that try to unionize or engage in concerted action. These examples all represent labor problems that take advantage of the employment relationship and subject workers to abuse.
During the Biden Administration, antitrust enforcers have also begun to view labor practices like these as a competition problem. Under Chair Lina Khan, the Federal Trade Commission (FTC) finalized a rule barring noncompetes as “unfair methods of competition.” In a speech earlier this year, FTC Commissioner Alvaro Bedoya argued that companies may also violate the unfair-methods prohibition when they engage in worker misclassification. The Department of Justice (DOJ) made similar statements in a 2022 administrative filing, finding that “firms that misclassify their workers as independent contractors may gain an unfair competitive advantage over their rivals in cutting their costs.” Taken together, these agencies have been asserting a broader point about the workplace. Firms that obtain cost advantages through labor abuses harm responsible businesses who refuse to mistreat their workers.
This conclusion might appear intuitive. Money is fungible, and the employer who steals wages can price their product lower than its peers that follow the law. Nonetheless, these positions have not gone unchallenged. Opponents of the FTC’s noncompete work commented that the rule “inappropriately meddles in labor and employment issues in which the FTC lacks expertise and enforcement experience,” while others have claimed that FTC action on misclassification would represent “an extraordinary usurpation of labor and employment law enforcement.” The weak version of this critique is prudential: other enforcers are better-positioned to address worker-related issues. While a full response to this claim is beyond the scope of this post, this objection neglects the institutional design of the Commission as an information-gathering “expert agency.” The broader objection is that “labor” issues and “competition” issues are separate and mutually exclusive. Wages, hours, and employment contracts, this critique goes, are “worker” problems that belong to the domain of labor and employment law. Competition law has nothing to say about them.
History says otherwise and can inform this conversation. In a new paper in the Yale Law Journal, I show that American leaders have long seen certain abusive labor practices as unfair methods of competition. From the early twentieth-century through the end of the New Deal, advocates for wage-law action explained the payment of substandard wages as a form of product-market unfairness. These individuals developed two theories that tied wage practices to fair competition, a “public-standards” theory and an “implicit-subsidy” theory. These understandings appeared in congressional testimony, floor debates, state legislative action, judicial decisions, union newspapers, and trade publications, and played a significant role in the Supreme Court’s post-Lochner wage doctrine and the enactment of the Fair Labor Standards Act (FLSA).
Public Standards: “Business Goes to the Wage Cutter”
During the early 1900s, Americans pressed for state-level wage-and-hour actions in response to a crisis of national poverty. Although many commenters concentrated on the labor harms of abusive wage practices, others considered their impact on competition. Advocates like former United Mineworkers president John Mitchell and business executive Edward Filene explained that firms that pay low wages compete by subverting public labor standards: The payment of substandard wages allows “dishonest and underhanded” firms to “under-cut[]” high-road employers. As the nation moved into the 1930s, similar understandings motivated the passage of the National Industrial Recovery Act (NIRA), the country’s first national wage-and-hour law. The NIRA’s framers and implementers viewed the Act’s labor sections as an assault on “chiselers” – firms who used sweatshop wage practices to outcompete peers in product markets. Business and labor leaders agreed, with disproportionate praise of the Act from “sick industries” afflicted by competition-induced labor abuses. One coal industry trade writer, for instance, hoped the NIRA would “shield the industry from a particularly vicious form of internal competition”: not paying workers. “No honest employer can hope to match the prices of a rival who skips paydays.”
The Supreme Court held the NIRA unconstitutional under the nondelegation doctrine in 1935, and the Roosevelt Administration proposed a new wage-and-hour bill, the current FLSA. Assistant Attorney General Robert Jackson, testifying in support of the bill, argued that the law would protect “the great majority of employers who really desire to treat labor fairly” from “the unfair methods of competition of those who utilize sweatshop methods to gain a competitive advantage.” Labor Secretary Frances Perkins concisely summarized the Administration’s concern, stating that “Business Goes to the Wage Cutter.” Business and labor echoed these points both inside and outside of Washington, with Congressman and labor advocate Arthur Healey denouncing the “substandard and antisocial practices” of “certain sweated industries,” and employers praising the attempts of unions to, in the words of BusinessWeek, lead “the bad boys” to “religion.” These voices made the same point that earlier advocates had established: abusive labor practices directly affect the balance of product-market competition. Wage-and-hour action was necessary to keep chiselers from beating their competitors through labor exploitation.
Implicit Subsidies: “A Subsidy for Unconscionable Employers”
Advocates like Mitchell and Filene further condemned sweatshops for taking advantage of social resources for private benefit. While the public-standards theory focused on how unfair employers directly undercut fair competitors, a second theory explained how these firms take implicit subsidies from the public and workers. “By not paying its employees an adequate wage,” the unfair employer “forces them to be supported, at least in part, by their relatives, friends, or by the public.” The use of substandard wages is essentially a form of below-cost pricing, as dishonest firms “draw upon a public subsidy as a fund which enables [them] to undersell competitors.” Felix Frankfurter advanced this argument in a 1917 Supreme Court brief supporting Oregon’s state wage rules, explaining that minimum wage laws enable the state to control these subsidies or restrict them completely.
The implicit-subsidy theory was present in the NIRA and FLSA legislative debates, although public-standards sentiment was more common. But the theory made its largest mark on the New Deal Supreme Court, where it contributed to the end of the Lochner era. In the 1937 Parrish decision (“the switch in time”), Chief Justice Charles Hughes showed an intense moral revulsion at the way in which labor “exploitation . . . casts a direct burden . . . upon the community.” Calling sweatshop production “a most injurious competition,” Hughes discussed wage law as a form of competition law that prohibits a fundamentally immoral tactic of economic advantage. Noting that “[w]hat these workers lose in wages the taxpayers are called upon to pay,” the Court concluded, “The community is not bound to provide what is in effect a subsidy for unconscionable employers.” This position in Parrish aided in clarifying that the Due Process Clause does not bar minimum wage laws, thereby removing key constitutional obstacles to the validity of the FLSA.
Taking on Modern-Day Chiselers
The FLSA was enacted in June 1938. Today, Section 2 of the Act still labels “the existence” of abusive labor conditions as “an unfair method of competition in commerce.” This statutory language reflects the public-standards theory and the implicit-subsidy theory prevalent during the Act’s consideration, theories which together illustrate how substandard wage practices are a kind of unfair competition.
As the federal government began to enforce the new law, critics questioned the Act’s fair-competition framing. In an early minimum-wage case, United States v. Darby, lawyers for sweatshop owner Fred Darby decried the Act in eerily similar terms to the modern critics above, calling it “a dangerous and radical extension of the concept of ‘unfair competition.’” The Supreme Court decisively rejected this position, upholding Darby’s prosecution for wage theft. The Court drew a tight link between wage law and antitrust law, discussing the payment of substandard wages as “a method or kind of competition” that the FLSA “has in effect condemned as ‘unfair,’ as the Clayton Act has condemned other ‘unfair methods of competition’ made effective through interstate commerce.” In other words, the Court recognized what Americans had long been saying: substandard wages let companies abuse their workers and, like antitrust violations, cheat their competitors.
Darby reflected a conception of the American economy in which “labor” and “competition” are intricately connected, not distinct. This view is relevant again today, where modern-day chiselers compete through wage theft, misclassification, and other forms of labor abuse. The election of Donald Trump means that the FTC and the DOJ are likely to depart from their current trajectory on labor issues. But advocates should continue to raise the connection between fair competition and worker mistreatment given the incoming Administration’s at-least professed commitment to helping American workers. Beyond the federal level, state unfair competition laws present a promising route for state officials and private plaintiffs seeking to address labor exploitation and other unfair methods of competition. Advocates and enforcers should look to this history as they continue to develop the connection between product-market fairness and labor-market abuses.
