Competition authorities around the world continue to sharpen their focus on markets for employee talent.
The current push to scrutinize competition issues in labor markets can be traced to guidance issued in October 2016 by federal antitrust enforcers in the United States. In their 2016 Guidance for Human Resource Professionals, the US Department of Justice and Federal Trade Commission put companies and their executives on notice that "naked" wage-fixing and no-poaching agreements could be prosecuted criminally. The guidance established that employers competing to hire or retain the same employees are "competitors" from an antitrust perspective, even if they do not make the same products or provide the same services.
Authorities across the world are following suit, intervening in labor markets to challenge anti-competitive practices and the unfair contractual terms of employers. Investigation and enforcement in this field is serious and carries the risk of criminal prosecution, hefty civil fines and damages claims, drawn-out and expensive class action litigation, as well as reputational harm.
The United States has set the bar and remains the highest risk jurisdiction from an enforcement standpoint, but enforcers across Europe, Asia and Latin America are catching up, as global authorities focus on harms to employees and the wider effects of employers' collusion in this area. As the OECD states, collusion between employers is the 'most detrimental anticompetitive practice in labor markets' (see 2019 OECD Report).
The following practices, whether or not they are embodied in a formal agreement, are illegal:
- Wage fixing agreements between organizations as to how much to pay their employees, for example imposing salary maximums, or capping or withholding pay rises and/or bonuses. This also applies to franchised businesses, which the US and OECD, among others, have highlighted as an area of high risk.
- No-poach agreements that restrict the movement of employees between rival employers (whether downstream competitors or not), which can prevent mobility and career development.
- Exchanging sensitive information relating to employees, such as their salaries, benefits, bonuses, holiday entitlements, allowances, healthcare and travel / relocation allowances. Such employee information should be treated in the same way as any other competitively sensitive data, and should not be shared with competing employers.
Given the ever increasing risk of enforcement in this area, companies should begin proactive planning to health-check their businesses and take protective action. We recommend that employers:
- Tailor. Review your contracts for risk, and tailor these agreements to adhere to the proper scope. Confirm that any existing, or future, non-solicitation clauses are within permitted boundaries.
- Train. Educate your staff, particularly those in HR and senior management. They must understand the personal and company risks, including the consequences of illegal no-poach and wage-fixing arrangements. You should have clear policies in place to help staff know what is considered impermissible behavior.
- Test. Health check your HR team. You should be aware of which industry group meetings and conferences they attend, which email and WhatsApp groups they are on, whether they communicate with counterparts at rival employers, and whether they understand competition law limits. Encourage them to come forward with concerns and spot check emails / messages to identify risks. Consider legal privilege throughout this process.
- Tune. Refine your business strategy to address new risks to your company's business activities/industries. Consider the protective options open to you if you uncover an issue. Can you effectively bring the conduct to an end and take remediation steps that will prevent reoccurrence? Do you need to consider protection from criminal and civil penalties before the authorities? Engage with expert legal counsel to make the right decisions.
- Track. Monitor competitive trends and activity in the job market. If there are skills that are in high demand but short supply, or if a particular competitor is on a hiring spree, those situations may create risky conditions leading to illicit discussions or agreements. If you have concerns regarding poaching, speak with legal counsel in the first instance to consider what your legitimate options may be and to also ensure that you have adequate but appropriate protections in place.
The COVID-19 pandemic has placed extraordinary pressure on employers. Companies the world over have had to deal with unprecedented challenges: navigating government support and furlough schemes, retaining talent while revenues and cash flow languish, and doing the right thing while not becoming an outlier in the market. The desire to gather market intelligence when faced with unprecedented circumstances is simply human nature.
Do you put staff on furlough? Do you cap furlough payments? Do you offer sabbatical or flexible working incentives? Do you pay bonuses this year? Do you freeze salaries, and for how long? Difficult questions, and all your competitors are wrestling with the same issues. You want to know what they are thinking.
But companies must be wary of any communications, agreements or understandings on such issues. Merely exchanging this information presents clear risks. There is no COVID-19 / we were struggling financially / we wanted to do the right thing defense to collusion in labor markets. And the authorities have called this risk out.
As we begin to emerge from the pandemic and try to get back to business as usual (or business in the new normal), competition authorities are primed to investigate "crisis collusion", and will vigorously pursue companies that have engaged in conduct that has impacted the vulnerable. This does not just mean consumers; it also means the global workforce.
Developments in the Gig Economy
It is not only the traditional labor markets that are attracting the attention of authorities around the world. Individuals in the gig economy are also under the spotlight as there is lingering uncertainty around their economic roles and the associated rights that come with them. Although it is very clear that restrictions within employment agreements are not antitrust violations, restrictive agreements between companies and independent contractors may very well be.
The pandemic has highlighted the importance of these individuals to the broader economy and some of the vulnerabilities that they face due to their lack of employment status and poor working conditions. The gig economy is lowering the entry barriers to the labor market. Countries around the world have been considering the official working status of these individuals and appear to have, at times, reached diverging views, for example:
- US: Voters in California backed a ballot initiative cementing the independent contractor status for Uber's and Lyft's drivers.
- UK: Supreme Court ruled unanimously that Uber's drivers are workers rather than independent contractors and are therefore entitled to minimum wage and paid annual leave.
- EU: DG COMP has initiated a consultation regarding EU competition law's scope of application to collective bargaining arrangements for employees and the "solo self-employed".
- LATAM: The Mexican government has made it mandatory for gig workers to file their taxes on a monthly basis. A Chilean court declared a messenger/driver for a delivery application was in fact an employee under the protection of the local labor law. Legislators in Chile, Colombia and Peru have all stated they are considering legislation that would grant more rights for gig-economy workers.
As the gig economy continues to grow rapidly, it will undoubtedly become an area of increasing importance for the market for talent and it is likely that there will be legal developments addressing this area; therefore, organizations will also need to keep abreast of these changes and consider how any of the incoming rules could impact them.
International Activity: the risk is real and now global
US: The US continues to lead the way in this area, investigating cases in various industries including the healthcare, transport, retail, education and sport sectors.
- Reinforcing their 2016 guidance in April 2020, the DOJ Antitrust Division and the FTC Bureau of Competition jointly warned industries in a press release to steer clear of naked no-poach agreements and wage-fixing, prompting a number of new investigations.
- In December 2020, the DOJ brought its first criminal wage-fixing case in this area, indicting the head of a Texas based staffing company for alleged participation in a conspiracy to fix the rates paid to physical therapists and physical therapist assistants.
- In March 2021, the Acting Assistant Attorney General of the DOJ Antitrust Division stated that practices involving wage-fixing and the allocation of employees are indistinguishable from market allocation and fixing the price of products, which therefore justifies criminal enforcement.
- So far in 2021, the DOJ has brought a number of additional actions of note—one in January against a health care company for alleged unlawful non-solicitation agreements with competitors, one in March against a health care staffing company for alleged wage fixing and another against a drinks company in relation to employee allocation deals otherwise known as "no-poach" agreements.
- In recent years, state attorneys general in the US have also been actively involved in investigating no-poach practices. For example, in March 2019 after a nearly year-long investigation, a coalition of 14 states entered into a settlement with four national fast food chains requiring the companies to stop using no-poach provisions in their franchise agreements, remove no-poach provisions from existing agreements, and ask their franchisees to post notices to inform employees of the settlement.
Brazil: March 2021 saw the announcement of the first investigation of the Brazilian competition authority (CADE) into Brazil's labor market. Three dozen companies in the healthcare sector have been implicated in a formal probe into the exchange of commercially sensitive information and wage-fixing agreements. The companies are alleged to have regularly exchanged information regarding employee remuneration and benefits through a cooperation group created to substitute specialized consultants.
Europe: Traditionally behind the US in this area, authorities across Europe are now warming up to enforcement. For example:
- In Italy, May 2019, a Turin-based taxi company was investigated for its driver employment terms. The company excluded drivers that would not agree to strict non-compete terms, which prevented them from driving for other taxi companies.
- In April 2020, the Lithuanian competition authority opened an investigation into the possible breach of antitrust rules by the nation's basketball league and basketball clubs, in relation to a meeting that was held, where it was alleged that the parties engaged in the exchange of sensitive information regarding the terms of payment of player salaries.
- In May 2020, Portugal's competition authority (AdC) used interim measures for the first time in over a decade to order the Portuguese Professional Football League to stop enforcing no-poach agreements between its teams. In April 2021, the AdC issued Statements of Objections (for the first time in the labor market) to the 31 organizations involved in the alleged behavior.
- In January 2021, the Hungarian competition authority fined a recruitment association €2.8 million for their role in anti-competitive employment terms. The organization had, inter alia, agreements preventing members from recruiting one another's employees.
- In April 2021, Poland's competition authority (UOKiK) began antitrust proceedings against the Polish basketball league and sixteen basketball clubs, having reportedly seen indications of coordination in respect of termination of players' contracts and withholding of players' remuneration. Notably, the UOKiK sought guidance from the European Commission and the Lithuanian competition authority, following a similar investigation into alleged anti-competitive behavior in the Lithuanian basketball league. This is clearly indicative of the fact that authorities are coordinating around these issues.
Asia: Authorities have been alert to HR / competition law risks with authorities publishing guidance around these issues:
- In 2018, the Japanese competition authority (JFTC) established a competition agency study group, which specifically considers antitrust issues in the labor market and provides guidance to organizations on the relevant competition law risks.
- Similarly, the competition authority in Hong Kong released an advisory bulletin in 2019, on unlawful HR arrangements.
It is also worth noting that divergent views exist between jurisdictions. For example, in Australia, the ACCC does not have jurisdiction to deal with agreements that relate to employment conditions, in the context of industrial relations. A jurisdiction-by-jurisdiction assessment may therefore be required and, with 77 offices worldwide, Baker McKenzie is uniquely placed to assist organizations with carrying out this assessment.
This area raises a myriad of issues and we appreciate that organizations often find it challenging to navigate a number of practical issues and questions within an uncertain legal landscape, such as:
- What are the specific areas of "competition" in the HR context
- Can I systematically ask for salary information and proof of current salary when hiring?
- Can non-compete clauses be included within secondment arrangements?
- What safeguards are required for personnel that are employed within a joint venture?
- Is it permissible to contribute to salary surveys?
The answers to each of these questions may vary depending upon the particular facts of your situation and the jurisdiction(s) in which you are operating. Employers must carefully consider the precise legal ramifications of each issue and proceed with caution.