At the end of last year, the US Department of Justice (DOJ) secured a guilty plea for wage fixing, resulting in its first criminal conviction with Assistant Attorney General Jonathan Kanter saying:
“[t]oday’s guilty plea demonstrates our commitment to ensuring that workers receive competitive wages and a fair chance to pursue better work and that criminals who conspire to deprive them of those rights are held accountable.”
Jason Frierson, US Attorney for the District of Nevada (where the plea was secured), added that:
“Protecting workers from antitrust schemes – such as wage-fixing and employee allocation – remains a priority for the U.S. Attorney’s Office”.
This conviction is built on a foundation first laid by the DOJ and the US Federal Trade Commission (FTC) in October 2016 in joint antitrust guidance issued by the agencies for “human resources professionals.” In this guidance, the US antitrust agencies put employers on notice that the DOJ would treat “naked” no-poach and wage-fixing agreements between employers (e.g. agreements that are separate from or not reasonably necessary to a larger legitimate collaboration) as per se unlawful. This joint guidance further warned that the DOJ intended to bring criminal prosecutions. While it took six years from issuance of that HR guidance for the DOJ to secure its first guilty plea in a no-poach case, the US antitrust agencies across two successive presidential administrations have kept the message consistent: antitrust violations in the labour markets will not be tolerated.
This development reflects a growing recognition that antitrust has a role to play in protecting employment markets and is leading to increased enforcement by competition authorities around the world against behaviours such as agreements between employers not to poach or solicit one another’s employees, or to fix salaries or other terms of employment. This development heralds a new era of cartel enforcement, looking into employment practices that have to date been largely untouched.
Why do competition authorities care?
Traditionally, competition authorities have focused on agreements between employers affecting the price, quality and availability of products and services. Increasingly, however, there is a view that companies not only compete for customers through the products and services they supply to the market, but also compete for services provided by employees. In some cases, companies that would not be considered “horizontal” competitors may nonetheless compete for the same talent-pool while hiring and thus could be considered competitors in the labour market, this is particularly pertinent given the current war for talent in may sectors.
Where agreements are reached that limit job opportunities for employees, or prevent better jobs from being created, competition authorities are increasingly concerned that this can reduce competition for talent (and in some cases have the effect of a purchasing cartel). This is not only harmful to competition on the labour market, but can reduce uncertainty about a key cost for competing businesses or create a barrier to expansion.
On 18 January 2023, the Canadian Competition Bureau made this point clearly, stating that “Like agreements between competitors related to price-fixing, market allocation and output restrictions, wage-fixing and no-poaching agreements undermine competition and the efficient allocation of resources. Maintaining and encouraging competition among employers results in higher wages and salaries, as well as better benefits and employment opportunities for employees”. From June 2023 it will be an offence in Canada for employers to agree to fix, maintain, decrease or control wages or other terms of employment, or to not solicit or hire each other’s employees.
What behaviours are problematic?
The main behaviours found to problematic under competition law are the following:
No-poach, or non-solicitation agreements, are agreements between companies not to target each other’s employees when recruiting. In some cases, this may even extend to not hiring employees who actively approach a company in response to a job advert. Employees are unlikely to know about the agreements.
While the European Commission has yet to take enforcement action against these types of practices, in June 2022 Director-General Olivier Guersent of the EC’s Directorate-General for Competition confirmed that it is “looking at how we could apply Article 101 [cartel prohibition] to these types of agreements in Europe”.
Across Europe, a number of national competition authorities have already sanctioned this type of behaviour. For example, France has fined three flooring manufacturers €302m for engaging in a cartel including a no-poach agreement (as well as price fixing and information exchange). Echoing the EC’s new position, the French Competition Authority considered the no-poach agreement an object restriction.
The Spanish Competition Authority has also issued infringement decisions, notably against freight forwarders (fines of €14m between seven companies) and hairdressers (fines of €51m between eight companies) in 2010 and 2011 respectively. Both decisions related to forming cartels that included no-poach agreements by “gentlemen’s agreements”. The cartels also involved information exchange, with the hairdressing cartel exchanging information on wages and expenses.
There has been increased enforcement across other European authorities including Hungary, Lithuania, Poland, Portugal, Romania and Turkey.
It is generally recognised that in an M&A context, non-solicitation clauses (preventing a seller from hiring from the business it has just sold for a limited period) are legitimate where they protect the goodwill and know-how acquired by the buyer. However, with the increased focus on no-poach arrangements, companies engaged in M&A will need to be careful to ensure non-solicitation clauses are targeted and limited to only that which is necessary to protect their legitimate business interests.
Agreements between companies or associations of companies on salaries, wage caps, wage cuts or levels of remuneration for specific roles are anti-competitive. These can also extend to other terms of employment such as working hours, and can take the form of agreements not to pay salaries or withhold payment on termination.
In the UK, for example, the Competition and Markets Authority (CMA) is investigating suspected anti-competitive behaviour in the purchase of freelance services for production and broadcasting of sports content. This is the first time the CMA has focussed an investigation on cartel-like behaviour concerning an agreement to fix the rates offered to staff. It is understood that this will focus on the pay offered to highly skilled staff, such as camera operators and sound engineers who work for a range of broadcasters.
It is also notable that in its draft Horizontal Guidelines published in January 2023, the CMA included a specific reference to agreement to fix wages as an example of a hardcore restriction in the context of joint purchasing (see paragraph 6.9), mirroring the EC’s draft Horizontal Guidelines published in March 2022 (see paragraph 316). As neither the CMA nor the EC had previously called out wage-fixing as a specific example of hardcore restrictions, this confirms their growing focus on employment-related conduct.
The Japan Fair Trade Commission published a report in February 2018, which assesses hiring practices for service providers and sets out when behaviour might be problematic. It is not yet clear what the next steps might be.
More recently, the Hong Kong Competition Commission published an Advisory Bulletin in August 2022 outlining its competition concerns regarding collaborations and/or exchanges between employers in the context of joint negotiations with employee bodies. It confirmed that joint negotiations between employee bodies and groups of employers to determine working conditions and other terms of employment are subject to the local competition legislation (and in particular, one of the conduct rules which prohibits anti-competitive agreements, concerted practices and decisions of associations of undertakings). Cartel and information exchange risks could potentially arise when employers take part in joint negotiations and they agree or exchange information on certain employment terms that could be competitively sensitive, (such as in relation to compensation and other entitlements applicable to their existing or potential employees), as opposed to competing against each other on employment terms in the labour market (see further below in relation to information exchange risks). While the competition watchdog has indicated that it currently has no intention to pursue any investigation or enforcement action against undertakings in the context of joint negotiations provided that certain conditions are met, the bulletin serves to warn employers to steer clear of any actions that are aimed at reducing the level of competition between them.
Companies may not exchange non-public competitively sensitive information, as this removes strategic uncertainty and can lead to collusive behaviour. Information on current and future pay, pay increases, collective bargaining strategies with trade unions, commissions, expenses allowances, strategies for hiring, public holiday rates and corresponding insurance costs are examples of employee related information that is likely to be considered to be competitively sensitive.
This raises an important issue for M&A transactions and particularly for due diligence. Parties to a transaction will as a matter of course need to consider how a buyer accesses the information on a target business in a manner that is competition law compliant. In particular, sellers will often need to put in place safeguards to ensure that commercially sensitive information is protected during the due diligence process (for example, agreeing enhanced confidentiality agreements, known as clean team arrangements, which limit the sharing of commercially sensitive information to an identified and limited group of advisers or individuals on the buy-side under clearly set out conditions). The impact of this increasing focus on employees and wages means that some employee-related information will be commercially sensitive and will need to be shared with a buyer during due diligence in a protected and safeguarded way (as with other types of commercially sensitive information).
What about non-compete clauses?
On 4 January 2023, the FTC reiterated its commitment to enforcement at the intersection of antitrust and employment by ordering that three non-compete agreements constituted an unfair method of competition and were illegal. The next day, it issued a Notice of Proposed Rulemaking to prohibit employers from imposing non-compete clauses on workers, with limited and narrow exceptions. For more information and for how this could impact your business practices, see our in-depth Article.
This development clearly puts non-compete restrictions also on the radar for competition authorities. Non-compete obligations typically restrict an employee from working for a competitor, or setting up their own company, within a certain period after leaving the company. As with agreements between employers, non-compete clauses can reduce uncertainty around cost and availability of a key input, and create barriers to entry for new entrants by making it harder for employees to move.
These types of restrictions are starting to attract attention from competition regulators, particularly in the US, for their impact on employees’ ability to move. Even if there is no agreement between companies, authorities may consider onerous non-competes as an abuse of dominance.
What does this mean for employers?
It is expected that the scrutiny of practices in employment markets will continue and if anything ramp up during the year ahead. It is clear that this new focus for enforcement firmly places conduct concerning employees on the list of areas to focus on for antitrust compliance, both in a deal context and on a day-to-day basis.
Firms would be well advised to audit their employment contracts and practices now (particularly their use of non-competes), and to think about the risks around sharing information about employees (including during a due diligence process). Careful attention should also be given to ensure that legitimate industry-wide discussions concerning market and economic conditions, and the impact these have on salaries or benchmarking of salaries or terms of employment, do not stray into conduct that could be found to be anti-competitive.