Wage fixing and no poach agreements: restrictions by object?

On 3 May 2024, the European Commission published a policy brief setting out how it is likely to view wage fixing and no poach agreements. This is the latest development in competition authorities' 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 two companies may be competing to hire the same talent, regardless of whether they compete on the products/services offered.
• The European Commission's policy brief focuses on wage fixing and no poach agreements which it considers are likely to be "by object" infringements, meaning the European Commission would not have to prove that the agreement actually had an anticompetitive effect.
• Enforcement action is expected to increase in the coming years, with the European Commission and other regulators worldwide indicating they are proactively looking for cases to investigate.

Background

While this is a relatively nascent area of competition enforcement, particularly in Europe, there have been a number of investigations in EU Member States including Belgium, Denmark, Finland, France, Hungary, Lithuania, Portugal, Romania and Spain. Several national competition authorities (NCAs) have also published guidance on potential competition law issues in labour markets. Most recently, 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 there is scope for more active enforcement. 

At the EU level, Commissioner Vestager indicated in a 2021 speech 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 law breaches in labour markets in November 2023. 

Policy brief

On 3 May 2024, the European Commission published its latest policy brief which focuses on antitrust issues in labour markets. Policy briefs are occasional papers by staff members of the European Commission about policy issues and key cases. While it does not necessarily reflect the official position of the European Commission, policy briefs are a useful indication of the European Commission's current thinking on a particular issue. 

The latest policy brief focuses on two areas of particular risk in labour markets: 

• Wage fixing agreements: agreements between two or more businesses to fix employees' salaries or other employment benefits. Wage fixing agreements were given as an example of buyer cartels in the EU horizontal guidelines (published in July 2023).
• No poach agreements: agreements where two or more companies agree not hire or solicit each other's employees. The policy brief indicates that the European Commission's analysis of whether an agreement is a by object infringement is unlikely to be affected by whether the agreement is sector-wide, bilateral, multilateral or reciprocal.

Competition issues in labour markets generally fall under the prohibition on anti-competitive agreements (Article 101 of the Treaty on the Functioning of the European Union (TFEU)). Specifically, the brief indicates that wage fixing agreements fall under Article 101(1)(a) as purchase price fixing agreements and no poach agreements fall under Article 101(1)(c) as supply-source sharing agreements – essentially, as "buyers cartels".

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 or services may compete for IT staff or inhouse lawyers.

By object restrictions

Infringements by object (for example, price fixing or market sharing) are the most serious form of competition infringement, where the very purpose of the agreement is to achieve the anti-competitive restriction. 

The policy brief indicates that wage fixing and no poach agreements are likely to be viewed as by object infringements in most cases. In addition, they are unlikely to qualify as ancillary restraints or to meet the criteria for individual exemption under Article 101(3). 

Based on the policy brief, arguments that wage fixing and no poach agreements have a legitimate objective are unlikely to succeed in persuading the European Commission that the agreement should not be considered as a by object infringement. In particular, the brief highlights that the agreement's objective (e.g. protecting an employer's investment in training or protecting non-patent IP rights) may be achieved by less restrictive means, such as through non-disclosure agreements, obligations to stay with an employer for a minimum period, repayment of proportionate training costs, and gardening leave. 

The policy brief also notes that non-compete clauses in employment contracts are generally outside the scope of Article 101 as they are not agreements between undertakings. Provided such clauses comply with national employment laws, the European Commission indicates that it would consider these provisions to be a less restrictive way of protecting, for example, an employer's investment in training.

Ancillary restraints

The European Commission's brief addresses arguments that wage fixing or no poach agreements should be considered as ancillary restraints. The brief considers two examples of where parties may argue that a no poach agreement is an ancillary restraint:

• Horizontal relationship: a research joint venture where the parties argue that they would only assign key personnel to the joint venture if they are sure that the other party will not poach their best employees; and
• Vertical relationship: a supply relationship where the parties argue that without the no poach agreement they would not enter into it.

In both cases, the European Commission envisages the parties arguing that they would risk losing their investment in training their employees, losing possible non-patent IP rights (such as trade secrets developed or learned by the employee) and/or being unable to fulfil their obligations under the main agreements due to their lack of staff. However, as noted in the brief, the European courts have consistently taken a strict approach to ancillary restraints.

Four cumulative conditions need to be met for no poach or wage fixing agreements to be considered as ancillary restraints: 

• there is a main non-restrictive transaction (e.g. a joint venture or supply agreement);
• the restraint directly relates to the transaction (i.e. it is inseparably linked to implementing the main transaction);
• the restraint is objectively necessary for the main transaction's implementation (i.e. it is not enough to show that it would be more difficult or less profitable to implement the main transaction without the restriction); and
• the restraint is proportionate to the main transaction (i.e. there should be no less restrictive means to allow the main transaction to take place).

The brief's analysis highlights that there may be other less restrictive means of ensuring the existence of the same relationship, including non-disclosure agreements, obligations to stay with an employer for a minimum period and repayment of proportionate training costs etc. In addition, the parties would need to demonstrate that the clause is appropriately scoped, e.g. it only applies:

• to the employees directly involved in the joint venture;
• for a justifiable duration; and
• within an adequately limited territorial scope.

While the brief does not indicate that no poach agreements will never be considered to be ancillary restraints, it will be challenging in many cases to demonstrate that the four conditions are met. It seems less likely that parties will be able to argue that wage fixing agreements are ancillary restraints. 

Application of Article 101(3)

Article 101(3) of the TFEU sets out an exemption to the Article 101(1) prohibition which applies where an agreement, although anti-competitive in principle, offers benefits (such as improving production or distribution or promoting technical or economic progress) that outweigh any harm to competition, provided that:

• consumers receive a fair share of the resulting benefits;
• the restriction is indispensable to attaining those benefits; and
• the restrictions do not afford the parties the possibility of eliminating competition for a substantial part of the products or services in question.

It will be challenging to argue that wage fixing or no poach agreements benefit from the Article 101(3) exemption. The policy brief focuses on the pro-competitive element of the exemption criteria. 

In relation to wage fixing, it is likely to be difficult to argue that wage fixing agreements have pro-competitive benefits. 

The position is likely to be more nuanced for no poach agreements: in principle, no poach agreements may have pro-competitive effects as they may protect companies' incentives to invest in training their employees without fear that they would later be hired away by competitors, but current research shows that net efficiencies are uncertain. In addition, the brief recalls the European Commission's guidance that pro-competitive effects are generally only taken into account under Article 101(3) if they take place in the same market as the anti-competitive effects. This means that any benefits for consumers (such as lower prices) would not be considered as the pro-competitive benefit is not achieved on the same market as the anti-competitive effects (the relevant labour market).

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 issued joint 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 brought by nurses which resulted in the award of treble damages for wage fixing. 

In the UK, the Competition and Markets Authority (CMA) published guidance for employers in February 2023. It 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. See our March 2024 update.

Comment

As the policy brief highlights, labour markets are often national, regional or local and therefore it is more likely that potential issues will be handled by the EU NCAs. However, the European Commission has emphasised that it is actively investigating leads in this area and will remain coordinated within the European Competition Network on these cases. 

Given this increase in enforcement activity, companies should consider whether they have appropriate guidance in place for their HR teams and employees responsible for negotiating documents which may contain no poach provisions (for example, joint venture agreements and vertical supply agreements).