UK Competition and Markets Authority Advises Employers: No Poaching, Wage Fixing, or Information Sharing

The UK Competition and Markets Authority has signalled its interest in bringing enforcement actions in the labour market by issuing guidance to employers on competition law compliance. The guidance warns employers that no-poaching agreements, wage-fixing agreements, and information sharing concerning the terms and conditions of employment may constitute unlawful practices.

On 9 February 2023, the UK Competition and Markets Authority (CMA) published guidance warning employers not to engage in anticompetitive agreements that can negatively impact labour markets. This is the first time the CMA has issued express guidance on the application of competition (antitrust) law to the labour market, warning employers that collusion between employers is illegal, and that “there are significant financial and personal consequences for breaking the law.”

The CMA goes on to note that there are three main types of anticompetitive behaviours in labour markets which, it states, “are all examples of business cartels”:

1. No-poaching agreements: Agreements between two or more businesses not to approach or hire each other’s employees, or not to do so without the consent of the other employer(s)
2. Wage-fixing agreements: Agreements between two or more businesses to fix employees’ wages—including wage rates or maximum caps on pay—or other employee benefits
3. Information sharing: Sharing sensitive information about the terms and conditions that a business offers to its employees

Agreements do not have to be in writing in order to infringe competition law; they may take the form of verbal agreements or informal practices. The CMA further clarifies that these above unlawful agreements or practices might cover freelancers and contracted workers as well as permanent salaried staff.

In addition, while not specifically listed by the CMA, it is possible that other types of arrangements could be subject to investigation in future. For example, employee stock plans typically contain “leaver” provisions under which, depending on whether the employee is a “good leaver” or “bad leaver,” the employer can require the employee to sell all or some of their shares at nominal value. It is possible that a “bad leaver” could seek to challenge such arrangements on the basis that, because they may be applied industry-wide, they amount to de facto no-poach or wage fixing by employers.

THE CMA’S INCREASED FOCUS ON COMPETITION ENFORCEMENT IN LABOUR MARKETS

The CMA’s guidance comes shortly after the CMA opened its first investigation into wage-fixing arrangements. In July 2022, the CMA announced that it had opened an investigation into suspected wage fixing by sports broadcasters in respect of the wage rates offered to freelance workers. Further, in its consultation in respect of its annual plan for 2023 to 2024, the CMA noted that it will investigate cartels that interfere in labour markets.

While competition authorities have traditionally focused on unlawful practices in respect of the supply of goods and services, the guidance reflects a growing belief that antitrust rules are also relevant in regulating the supply of labour and signals the CMA’s intention to focus its powers of enforcement on agreements that it perceives as affecting the labour market.

In the United States, the Department of Justice (DOJ) (jointly with the US Federal Trade Commission) issued its Antitrust Guidance for Human Resource Professionals in October 2016, signalling for the first time that the DOJ would “proceed criminally against naked wage-fixing or no-poaching agreements.” In October 2022, the DOJ made good on its warning and secured its first criminal conviction in respect of a labour market antitrust violation, when a healthcare staffing company pleaded guilty to violating Section 1 of the Sherman Act for entering into a nine-month agreement not to recruit nurses from a competitor school district or to raise school nurses’ wages.

NONCOMPETE AGREEMENTS

It is important to note that the CMA’s guidance does not concern common contractual provisions (restrictive covenants) in agreements between employers and employees that restrict individual employees from working with competitors for a period following termination of employment (non-compete) or soliciting other employees to leave (non-solicit). These types of clauses may be permissible subject to the rules on enforceability under the applicable national law.

Under English law, the starting point is that restrictive covenants are void as a restraint of trade unless an employer has a legitimate interest (such as confidential information, business connections or protecting the stability of the workforce) and the restrictive covenants are reasonably drafted to go no further than is necessary in protecting the legitimate interest in question. It will be a question of fact as to whether a particular restrictive covenant is enforceable depending on the role and responsibilities of the employee in question.

In the United States, however, the Federal Trade Commission (FTC) announced a notice of proposed rulemaking (NPRM) on 5 January 2023, that would ban employers from entering into and maintaining noncompete clauses with their workers. The proposed rule would require employers to rescind existing non-compete clauses with workers no later than the final rule’s compliance date.

STEPS TO TAKE

• Train human resources (HR) staff in antitrust rules relevant to HR practices.
• Ensure that robust internal reporting processes are in place and that staff are made aware.
• Carefully consider the proportionality of post-termination restrictions. Care should be exercised when entering into or requesting undertakings following a dispute as to the scope of restrictions.
• Conduct a legal review of any agreements that may have the effect of restricting the hiring of employees from competitors or preventing competitors from being able to hire your employees. This should include any informal agreements in place.
• Conduct a legal review of any agreements that may have the effect of restricting the hiring of employees more generally. For example, in commercial service agreements, if it is necessary to include a restriction on poaching of either party’s employees during the term of the agreement, ensure that appropriate carveouts are included to prevent an anticompetitive effect (e.g., the use of carveouts in relation to employees that independently apply via a recruiter or job advertisement).
• Ensure any roundtable meetings or “round robin” emails have a clear agenda, an express pro-competitive purpose, and that no forward-looking information on salary levels, bonuses/incentives, and hiring levels is shared. If such information is shared, refuse to accept the information and walk out of the meeting/delete the email and record that this action was taken.
• Use third party-survey organisations but ensure all information shared is historical, anonymised, and not forward looking.
• Where potentially illegal agreements or practices are identified, consider whether to admit wrongdoing to the regulator in order to apply for leniency before a competitor does or before an employee informs the competition authorities under a whistleblower programme.

HOW WE CAN HELP

Morgan Lewis can support clients in a number of ways with respect to managing potential employment-related competition concerns, including:

• Compliance training for HR in-house counsel and/or HR executives
• Tailored audits of HR practices, such as interviewing HR personnel to proactively identify potential violations or risk areas
• Contract reviews—working closely with in-house counsel to find, review, and modify contracts to comply with multijurisdictional antitrust standards
• Due diligence in a merger and acquisition context—working closely with transactional colleagues to ensure that they are knowledgeable about what to look for when conducting due diligence
• Guiding our clients in navigating processes and identifying prompt steps to minimize exposure when enforcement issues arise, including applying for leniency. We have already had success in assisting clients before the competition authorities and courts on these issues, including on criminal antitrust issues in the United States.
• Advising on best practices in structuring whistleblowing procedures, including involvement of external counsel, where appropriate