Supply-Chain Wage Theft as Unfair Method of Competition
abstract. This Note argues that we should understand wage theft in the fissured economy as a competition problem, not just a labor problem. Specifically, it argues that the Federal Trade Commission (FTC) should use its “unfair methods of competition” authority under Section 5 of the Federal Trade Commission Act to find supply-chain wage theft unlawful under certain circumstances. The Note first recovers and reasserts a historical understanding of substandard wages as an unfair method of competition. It then applies this understanding to the modern fissured economy, proposes FTC action, and defends the merits of the proposal.
author. J.D. expected 2025, Yale Law School; B.S.F.S. 2019, Georgetown University. Many thanks to Alvin Klevorick, Amy Kapczynski, Andrew Costa-Kelser, Christine Jolls, David Seligman, David Weil, Luke Herrine, Sally Dworak-Fisher, Sandeep Vaheesan, William Eskridge, Daniel Backman, Grace Watkins, Gustavo Berrizbeitia, Matt Buck, Michael Swerdlow, Peter Morgan, Teddy Watler, and anonymous reviewers for helpful discussions, comments, and suggestions. Thanks to the editors of the Yale Law Journal, particularly Sloane Weiss, for time, labor, and recommendations that vastly improved this piece. All errors are mine.
Introduction
The United States faces a “wage theft epidemic”1 in an increasingly “fissured”2 economy. This Note offers a novel theory of how fissuring implicates fair competition, and it raises a new way to create accountability for a specific labor practice, supply-chain wage theft, using competition-law authorities. As David Weil and others have explained, “fissuring” describes a reorganization of business activity that purports to disconnect “control” over work from legal “responsibility” for work-law compliance,3 through arrangements like “subcontracting, franchising, and supply-chain structures.”4 Work-law obligations generally turn on “employer” status: a firm must, for example, ensure that workers receive the minimum wage only if they “employ” those workers.5 In fissured work arrangements, “lead” firms—Weil’s term for “[l]arge businesses . . . operating at the top of their industries”6—design their operations to attempt “to avoid employer status.”7 At the same time, these firms use their market power and contracting to maintain “employment-like” authority over the work performed on their behalf.8 Taken together, lead firms “have their cake and eat it too”9: they can dictate the most intricate details of supply-chain work while dropping responsibility for the labor protections of supply-chain workers.10
A large body of evidence suggests that fissuring reduces wages, in part, by increasing wage theft among corporate suppliers and contractors. Across the American economy, extensive fissuring consistently coincides with near-endemic disregard for wage-and-hour laws.11 In some cases, lead businesses cause certain wage theft by demanding contract prices so low that contractors cannot possibly pay workers in accordance with the law.12 The lead firms who produce this wage theft, however, are not legally responsible under employment laws as currently interpreted,13 and labor enforcers can do little to hold them accountable with their existing authority.14 Department of Labor (DOL) officials, finding substandard wages to be ubiquitous among contractors in industries like garment production,15 have had to resort to begging lead businesses to “begin conversations”16 and “come to the table,”17 even when agency investigations clearly identify the behavior of these firms as the root of the problem.18
An emerging body of scholarship has considered the intersection of labor and competition in the fissured economy.19 For the most part, however, contemporary understandings of “fair” economic practices silo product markets and labor markets. When commenters think about “fair” product-market competition, they usually focus on product-market practices—for example, how a company prices its goods or advertises its services. Likewise, when commenters think about “fair” labor practices, they generally consider the interaction between employer and worker, such as how much an employer pays or how long they require a worker to labor.20 Recent work, most notably by Eric A. Posner, has argued that certain practices traditionally viewed through a product-market lens, like mergers, have significant impacts on labor-market competition and outcomes for workers.21 This Note seeks to demonstrate the inverse: labor-market practices—like how a company treats its workers—affect fair product-market competition, that is, the practices that are on-limits and off-limits to business competitors seeking advantage.22
This Note proceeds in two main parts, one historical and one forward-looking. The Note demonstrates that, historically, many Americans understood “fair” labor practices and “fair” product-market competition as intertwined. Since the early twentieth century, advocates have understood the use of a certain labor practice, the payment of substandard wages, as a type of unfair product-market competition. This understanding continued throughout national debates on wage-and-hour legislation during the 1930s, when political, business, and labor leaders repeatedly conceived of substandard wages as “an unfair method of competition.”23 The theories of unfair competition expressed then—substandard wages as competition by subversion of public norms and substandard wages as taking an implicit subsidy from workers and the public—are more relevant than ever in today’s fissured economy.24 I seek to “recover” and reassert this historical understanding.25
Reassertion of these past conceptions is important for several reasons. In the last few years, “New Brandeisians” have challenged the Chicago School antitrust paradigm, seeking to train competition enforcement on “the harms caused by undue market power,” and thereby move back toward the original intent of the antitrust laws.26 Intellectually, the history that this Note examines provides important context for new works offered by neo-Brandeisian scholars that emphasize the ways in which fissuring and other labor practices may impede fair competition.27 The competition lens is not a new way of thinking about wage theft and other labor practices: the understanding that labor-market abuses undermine fair product-market competition was once widespread, contributing to arguments before the Supreme Court and the passage of two national wage-and-hour laws. By explicitly naming two distinct theories of how competition on subminimum wages is unfair and developing those theories as a through line from the 1910s through the early 1940s, this Note builds upon previous historical scholarship28 and follows other authors in providing historical grounding for neo-Brandeisian competition-law work.29
More practically, this history informs ongoing debates about the relationship between “labor” issues and “competition” issues. Under Chair Lina M. Khan, the Federal Trade Commission (FTC) has taken action at the crossroads of these fields.30 Opponents of these actions have asserted a strict delineation between the spheres of labor and competition.31 The history recounted by this Note shows that members of the American government, labor movement, and business community have long viewed these spheres as interrelated and overlapping: the payment of substandard wages is both a “labor” harm and a “competition” harm, and such treatments are not mutually exclusive. As debates about new competition action continue, we should recognize this link once again.
This historical view offers a new way of understanding the fissured economy, where both historical theories—what this Note calls the public-standards theory and the implicit-subsidy theory—are increasingly apposite. Applying this history to the modern day shows that wage theft in the fissured economy is not just a labor problem but also a competition problem. Lead firms in fissured supply chains contribute to worker abuse when they produce supply-chain wage theft, cheating hard-working Americans and relegating many to poverty.32 Importantly, however, these firms can also use resultant stolen wages to reduce costs, outcompeting honest competitors who follow the law and ensure that their contractors do as well.33 Advocates debating national wage-and-hour laws recognized that lead firms would use contracts to gain unfair competitive advantages from wage theft.34 In the modern economy, fissuring has rendered their solution of extending liability to the contractor insufficient.35 Given the inability of labor enforcers to reach lead firms, policy innovation is necessary to protect workers and stop unfair competition on stolen wages.
Reviving the notion that labor-market practices implicate product-market fairness broadens the range of authorities that officials might use to address supply-chain wage theft. Spurred by its historical recovery, this Note points to a new route to reestablish wage accountability in the fissured economy through competition-law enforcement. Specifically, it proposes that the FTC use its “unfair methods of competition” authority under Section 5 of the FTC Act36 to hold lead businesses responsible for failing to take “reasonable care to prevent” supply-chain wage theft.37 Adapting a proposal by Brishen Rogers, the Note argues that when a company negligently fails to prevent supply-chain wage theft, defined to include wage theft in all entities from which a firm directly or indirectly “purchase[s] goods or services” within the United States,38 that company gains an unfair competitive advantage in violation of Section 5.
The Note makes this argument in four Parts. Part I considers the main problem: “the epidemic of wage theft” affecting American workers in the fissured economy. Part II recovers a historical understanding of substandard wages as a competition problem. Part III introduces the Note’s main policy prescription: FTC regulation of supply-chain wage theft using Section 5 of the FTC Act. Part IV explains why this proposal is likely to be effective at reducing supply-chain wage theft.
Numerous scholars have described wage theft as an epidemic. The first author to do so may have been Kim Bobo. Kim Bobo, Wage Theft in America: Why Millions of Working Americans Are Not Getting Paid—And What We Can Do About It 124 (2009). Other works using the term “epidemic” include, for example, Elizabeth Wilkins, Silent Workers, Disappearing Rights: Confidential Settlements and the Fair Labor Standards Act, 34 Berkeley J. Emp. & Lab. L. 109, 109, 111 (2013); Brady Meixell & Ross Eisenbrey, An Epidemic of Wage Theft Is Costing Workers Hundreds of Millions of Dollars a Year, Econ. Pol’y Inst. 1-2 (Sept. 11, 2014), https://files.epi.org/2014/wage-theft.pdf [https://perma.cc/CJ7B-49Y8]; and Elizabeth J. Kennedy, Wage Theft as Public Larceny, 81 Brook. L. Rev. 517, 528-29 (2016).
Weil, supra note 2, at 8, 94. I say “purports” because workers have strong arguments that, under a proper understanding of the Fair Labor Standards Act (FLSA) definition of employment, many lead firms remain joint employers with wage-law obligations. (Thanks to Sally Dworak-Fisher for pushing me on this point.) See, e.g., Bruce Goldstein, Marc Linder, Laurence E. Norton, II & Catherine K. Ruckelshaus, Enforcing Fair Labor Standards in the Modern American Sweatshop: Rediscovering the Statutory Definition of Employment, 46 UCLA L. Rev. 983, 1136-52 (1999); Cynthia Estlund, Who Mops the Floors at the Fortune 500? Corporate Self-Regulation and the Low-Wage Workplace, 12 Lewis & Clark L. Rev. 671, 689-90 (2008); Kati L. Griffith, The Fair Labor Standards Act at 80: Everything Old Is New Again, 104 Cornell L. Rev. 557, 587-603 (2019). I set this point aside, see infra Section I.D, but workers should continue to make these arguments.
29 U.S.C. § 206 (2018); see also Kenneth G. Dau-Schmidt, The Problem of “Misclassification” or How to Define Who Is an “Employee” Under Protective Legislation in the Information Age, in The Cambridge Handbook of U.S. Labor Law for the Twenty-First Century 140, 141-46 (Richard Bales & Charlotte Garden eds., 2020) (describing how employment laws cover “employees” but do not apply to “independent contractors”).
Callaci & Vaheesan, supra note 7, at 29. Contracts may go so far as to regulate the footsteps of supply-chain workers. See id. at 31 (describing how poultry supply-chain contracts “include . . . detailed prescriptions regarding lighting, heating, ventilation, cooling, and even mandatory instructions on where and how to walk through the chicken house”).
See, e.g., Gwendolyn Gissendanner, California’s Garment Worker Protection Act Serves as a Victory Against Rampant Wage Theft and Signals a Call for Accountability in All Supply Chains, OnLabor (Nov. 17, 2021), https://onlabor.org/californias-garment-worker-protection-act-serves-as-a-victory-against-rampant-wage-theft-and-signals-a-call-for-accountability-in-all-supply-chains [https://perma.cc/R2J3-XRVR] (“On average, retailers only pay manufacturers 73% of the price needed to support a minimum wage, and the manufacturers pass on the cost to employees through reduced pay and poor working conditions.”); see also Labor Violations in the Los Angeles Garment Industry, Garment Worker Ctr. 4 (Dec. 2020), https://garmentworkercenter.org/wp-content/uploads/2023/03/LA-Industry-Report-December-2020-.pdf [https://perma.cc/8M8P-YFUF] (“Brands routinely price their orders so low that factory owners are encouraged to skirt labor law . . . .”).
See, e.g., Margot Roosevelt, Why Wage Theft Is Common in Garment Manufacturing, Orange Cnty. Reg. (July 30, 2018, 12:15 PM), https://www.ocregister.com/2016/11/29/why-wage-theft-is-common-in-garment-manufacturing [https://perma.cc/6EE9-FN9J] (quoting a Department of Labor (DOL) official as saying, “We’ve been beating our heads against the wall . . . . Retailers have the power to have a quality monitoring program. We need them to come to the table.”); Natalie Kitroeff & Victoria Kim, Behind a $13 Shirt, a $6-an-Hour Worker, L.A. Times (Aug. 31, 2017), https://www.latimes.com/projects/la-fi-forever-21-factory-workers [https://perma.cc/5ABM-G22D] (describing the lack of accountability for retailers buying from delinquent Los Angeles garment makers).
In 2000, a DOL sample of registered garment-manufacturing contractors in Los Angeles found that fifty-four percent were breaking federal minimum-wage laws. David Weil, Public Enforcement/Private Monitoring: Evaluating a New Approach to Regulating the Minimum Wage, 58 Indus. & Lab. Rels. Rev. 238, 244-45 (2005) [hereinafter Weil, Public/Private]. Sixteen years later, DOL found that eighty-five percent of businesses in a similar sample were committing wage-law violations. David Weil, Garment Industry’s Wage Violations Share Common Thread, U.S. Dep’t of Lab. [2] (Dec. 22, 2016) [hereinafter Weil, Common Thread], https://garmentworkercenter.org/wp-content/uploads/2023/03/Garment-Industry-Wage-Violation-December-2016.pdf [https://perma.cc/FNP4-7RQP]; see also Gissendanner, supra note 12 (mentioning this finding); Labor Violations in the Los Angeles Garment Industry, supra note 12, at 2 (same). Just last year, DOL again reported extensive noncompliance among these same employers: eighty percent of firms examined in DOL’s Southern California Garment Survey were violating the FLSA. Unfit Wages: US Department of Labor Survey Finds Widespread Violations by Southern California Garment Industry Contractors, Manufacturers, U.S. Dep’t Lab. (Mar. 22, 2023), https://www.dol.gov/newsroom/releases/whd/whd20230322-0 [https://perma.cc/96T9-UEQC]; see also Shirley Lung, Exploiting the Joint Employer Doctrine: Providing a Break for Sweatshop Garment Workers, 34 Loy. U. Chi. L.J. 291, 296-97 (2003) (reviewing similarly troubling findings from the 1990s).
See Weil, Common Thread, supra note 15, at [2] (“The heart of the problem lies squarely with the pricing structure dictated by the retailers in this industry. The prices they pay for garments fail to support manufacturers’ ability to provide sewing contractors even the most basic worker protections—minimum wage and overtime.”).
See, e.g., Sanjukta Paul, Fissuring and the Firm Exemption, 82 Law & Contemp. Probs., no. 3, 2019, at 65, 65-67; Marshall Steinbaum, Antitrust, the Gig Economy, and Labor Market Power, 82 Law & Contemp. Probs., no. 3, 2019, at 45, 45; Brian Callaci & Sandeep Vaheesan, How Antitrust Can Help Tame Capital and Empower Labor, 32 New Lab. F., no. 3, 2023, at 50, 53; Sandeep Vaheesan, A Revival of Nondomination in Antitrust Law, 93 Geo. Wash. L. Rev. (forthcoming 2024) (manuscript at 45-47), https://ssrn.com/abstract=4771094 [https://perma.cc/RN3Q-AWUB]; Alvaro M. Bedoya, Comm’r, Fed. Trade Comm’n, “Overawed”: Worker Misclassification as a Potential Unfair Method of Competition, Remarks at Global Competition Review: Law Leaders Global Summit 4 (Feb. 2, 2024), https://www.ftc.gov/system/files/ftc_gov/pdf/Overawed-Speech-02-02-2024.pdf [https://perma.cc/FAH2-MC73]. Brian Callaci and Sandeep Vaheesan briefly touched on the historical understanding I raise. See Callaci & Vaheesan, supra, at 55 (discussing Louis Brandeis); id. at 56 n.19 (connecting the legislative history of the FLSA with the Federal Trade Commission (FTC) Act).
See Eric A. Posner, How Antitrust Failed Workers 1-8 (2021); Eric A. Posner, The New Labor Antitrust 4 (Sept. 17, 2023) (unpublished manuscript) [hereinafter Posner, The New Labor Antitrust], https://ssrn.com/abstract=4575258 [https://perma.cc/YDL2-SKT3].
A few authors have made arguments in this vein, most notably around misclassification. For some examples of works making such arguments, see generally supra note 19; infra notes 130-134. Under common law, “unfair competition” referred to “passing off the goods of one company as the products of another.” See Neil Averitt, The Meaning of “Unfair Methods of Competition” in Section 5 of the Federal Trade Commission Act, 21 B.C. L. Rev. 227, 235 (1980); see also Amy Kapczynski, The Public History of Trade Secrets, 55 U.C. Davis L. rev. 1367, 1384 (2022) (noting that unfair-competition common law “also evolved to include false advertising, misappropriation of trade secrets, and, prior to the Sherman Act, wrongs that sounded in antitrust”). This Note uses “unfair competition” in its broader sense to describe practices that are considered off-limits to business competitors seeking advantage. The framers of the FTC Act envisioned the term this way. See Averitt, supra, at 234-35. Modern scholars use the term this way as well. See, e.g., Sandeep Vaheesan, The Morality of Monopolization Law, 63 Wm. & Mary L. Rev. Online 119, 122-23 (2022).
Seth D. Harris has previously used the term “unfair subsidies” to discuss similar concepts in the work of early twentieth-century economists. Harris, supra note 23, at 37. My work builds upon Harris, as discussed below. See infra note 156. David Weil and Elizabeth Wilkins have used “public standards” and “public norm” to describe related conceptions of the FLSA. Weil, supra note 2, at 242; Wilkins, supra note 1, at 114.
See, e.g., Rep. Virginia Foxx, Comment Letter on Non-Compete Clause Rule 1 (Mar. 27, 2023), https://edworkforce.house.gov/uploadedfiles/ftc_noncompete_comment_letter.pdf [https://perma.cc/Y829-43ZF] (arguing that the noncompete proposal “inappropriately meddles in labor and employment issues in which the FTC lacks expertise and enforcement experience”).
See, e.g., The Social and Economic Effects of Wage Violations: Estimates for California and New York, Final Report, E. Rsch. Grp. 47-48 (Dec. 2014), https://www.dol.gov/sites/dolgov/files/OASP/legacy/files/WageViolationsReportDecember2014.pdf [https://perma.cc/D8J6-NK36].
See, e.g., Bobo, supra note 1, at 197-98; Catherine Ruckelshaus, Rebecca Smith, Sarah Leberstein & Eunice Cho, Who’s the Boss: Restoring Accountability for Labor Standards in Outsourced Work, Nat’l Emp. L. Project 5 (May 2014), https://www.nelp.org/app/uploads/2015/02/Whos-the-Boss-Restoring-Accountability-Labor-Standards-Outsourced-Work-Report.pdf [https://perma.cc/QL7T-4BUH].
See Estlund, supra note 4, at 690 (“Congress did not prohibit any contracting-out arrangements. But it did seek to eliminate employers’ ability to use them in a way that fostered substandard labor conditions and undercut responsible employers.”). During the FLSA hearings (discussed extensively below), for example, Assistant Attorney General Robert H. Jackson insisted that, under the Commerce Clause, the Act could reach local sugar manufacturers whose product might end up out of state and thus affect interstate commerce. See Fair Labor Standards Act of 1937: Joint Hearings on S. 2475 and H.R. 7200 Before the S. Comm. on Educ. & Lab. & the H. Comm. on Lab., Part 1, 75th Cong. 85-87 (1937) [hereinafter FLSA Hearings, Part 1] (statement of Robert H. Jackson, Assistant Att’y Gen. of the United States). If they were not covered, he said, “the law would be a nullity, because [large firms] could farm out the parts of the work that they wanted to do under substandard conditions.” Id. at 87. In other words, large firms bound by the FLSA could circumvent their wage-law obligations by contracting with local firms paying subminimum wages, thereby achieving a competitive advantage.
Id. at 3; see also Timothy P. Glynn, Taking the Employer out of Employment Law? Accountability for Wage and Hour Violations in an Age of Enterprise Disaggregation, 15 Emp. Rts. & Emp. Pol’y J. 201, 205, 227 (2011) (defining supply-chain wage theft as “violations in the production of any goods and services [commercial actors] purchase, sell, or distribute, whether directly or through intermediaries”). This definition includes domestic third-party suppliers and contractors but would not include franchisees or international counterparties. As noted below, the Commission should target lead firms for policy reasons, see infra note 437 and accompanying text, but the theory is not limited to firms of a certain size.