CMA's growing interest in labour markets

Competition authorities have shown an increasing interest in potential competition issues in labour markets in recent years. Regulators from the USA, EU and UK have issued guidance for employers on how to comply with competition law and opened investigations into alleged anticompetitive conduct. 

Key takeaways

• The concept of competitor is broader in the context of labour markets: the key question is whether the businesses concerned may be competing to hire the same talent, whether employed or freelance, regardless of whether they compete on the products / services offered.
• Three areas of particular risk have been highlighted: no poach agreements, wage fixing and information sharing.
• Enforcement action is expected to increase. The UK Competition and Markets Authority (CMA) has highlighted labour markets as an area of focus in its draft Annual Plan and opened three enforcement investigations.

Background

On 25 January 2024, the CMA published a research report by the new Microeconomics Unit on "Competition and market power in UK labour markets". This is the latest indication of the CMA's current focus on competition issues in labour markets which was highlighted in its Annual Plan for 2023/2024 and the draft Annual Plan for 2024/2025. The CMA also released high level guidance for employers in February 2023 on how to avoid engaging in anti-competitive behaviour. 

The CMA has three live investigations relating to conduct on labour markets: two relate to freelance and employed workers in the production, creation and/or broadcasting of television content and one arose in the context of a cartel investigation in the fragrance sector. On 7 February 2024, Sarah Cardell (Chief Executive of the CMA) commented that the CMA has a "couple more" potential labour market investigations in the pipeline. 

January 2024 report

The report concludes that labour market concentration in the UK is approximately the same as it was 20 years ago despite significant changes to the structure of the labour market, including the rise of the gig economy and the impact of the Covid-19 pandemic. However, some areas and industries have high levels of concentration which can impact wage levels. 

The report also highlighted that the use of non-compete provisions in employment contracts is widespread (approximately 26% of UK workers are subject to a non-compete), even in low-paid jobs. In a speech on 25 January 2024 commenting on the report, Sarah Cardell noted that non-compete arrangements between an employer and an employee do not generally infringe competition law and are a matter of employment law. The report highlights that there are often legitimate reasons for including post-term non-competes (e.g. to protect the investment employers make in training their staff) but the research shows that not all non-competes are being used to protect substantial training or client relationship investments. Sarah Cardell commented that these findings support the UK Government's proposal to limit the duration of post-term non-competes (see below). 

In her speech, Sarah Cardell reiterated the CMA's current interest in potential competition issues in labour markets but stressed that the competition rules do not generally regulate contracts between an employer and an employee. She added that the CMA, in line with international competition authorities, does not intend to scrutinise genuine collective bargaining between self-employed workers and employers. 

Areas of risk

Competition issues in labour markets generally fall under the prohibition on anti-competitive agreements (Chapter I of the Competition Act 1998 in the UK and Article 101 of the Treaty on the Functioning of the European Union in the EU). 

In its February 2023 guidance, the CMA highlighted three areas of particular risk in labour markets: 

• No poach agreements: agreements where two or more businesses agree not to approach or hire each other's employees (or not to do so without the current employer's consent).
• Wage fixing agreements: agreements between two or more businesses to fix employees' salaries or other employment benefits. The CMA noted that this could include agreeing to pay the same wages or setting maximum caps for pay. Wage fixing agreements were given as an example of buyer cartels in the UK horizontal guidelines (published in August 2023).
• Information sharing: businesses sharing sensitive information about terms and conditions of employment. The CMA highlighted that this could cover freelancers and contracted workers, as well as permanent employees.

Companies will need to carefully consider who their competitors are in labour markets: it is not necessary for the companies to compete in the products or services they supply. The key is whether companies are competing for talent. For example, companies offering different products may compete for IT staff or inhouse lawyers.

Global interest

Competition authorities worldwide have shown an increasing interest in potential anti-competitive conduct in labour markets in recent years. The US Department of Justice (DOJ) and Federal Trade Commission (FTC) were the first to take a stance on competition issues in labour markets when they published guidance in October 2016. The DOJ and FTC have been particularly interested in no poach agreements and announced the first criminal charges for a no poach agreement in 2021. There have also been several civil class actions brought by employees against employers: for example, a claim was brought by nurses which resulted in the award of treble damages for wage fixing. 

In a 2021 speech, Commissioner Vestager indicated that that the European Commission was interested in non-classic cartels including no poach agreements as an area of enforcement activity. She also highlighted wage fixing agreements as an example of a buyer cartel with a "very direct effect on individuals".  The European Commission conducted its first raids relating to alleged competition labour breaches in labour markets in November 2023 when it raided  companies active in the online food delivery sector in relation to alleged no poach agreements.

There have been numerous investigations into alleged competition law infringements in labour markets in recent years with cases in Belgium, Denmark, Finland, France, Hungary, Lithuania, Portugal, Romania and Spain in the EU, as well as Brazil, Colombia, Switzerland, Turkey and the USA. These investigations span a wide range of sectors, including banking, healthcare, sport and software. 

On 16 January 2024, the Nordic competition authorities published a joint report on competition law and labour markets. Noting that there is increasing enforcement across the EU, the report indicates that wage fixing and no poach agreements are not uncommon in the Nordic countries and suggests that there is scope for more active enforcement. 

Potential legislative reform

In addition to scrutiny from competition authorities, employment restrictions have been on the legislative agenda in the UK and the USA. 

Post termination employment covenants are often included in senior employees' employment contracts; however, the CMA's research concluded that the use of non-competes is widespread (including for low-wage employees) in the UK. Currently, for a provision to be enforceable in the UK, an employer must demonstrate that the covenant goes no further than is reasonably necessary to protect its legitimate business interests. 

In order "to boost flexibility and dynamism in the labour market, and to unleash greater competition and innovation", the UK Government has confirmed that it intends to introduce legislation to limit the length of non-compete clauses to three months when parliamentary time allows. This is quite a radical change from the current position: the CMA's January 2024 report found that the most common duration of non-competes is six months. 

It appears that the legislation will only apply to employment contracts (i.e., non-compete clauses in shareholders agreements will not be caught). Employers will still be able to use paid notice periods, gardening leave and non-solicitation clauses, and the proposed changes do not appear to impact confidentiality provisions in employment contracts. 

In January 2023, the Federal Trade Commission (FTC) proposed a complete ban on non-competes (including any other contractual provisions which have the effect of limiting an employee's ability to look for or accept a job) with limited exceptions relating to the sale of a business. The FTC's proposal indicates that employers would need to rescind non-competes in existing contracts and proactively inform employees that the clauses no longer apply. The FTC has also sought views on whether there should be an exemption for senior executives and whether the rule should distinguish between low-wage and high-wage employees. Reports indicate that the FTC may vote on the final version of the rule in April 2024.