No-poach agreement: an olistic approach towards the EU

No-poach agreement: an olistic approach towards the EU

Employee non-pouching agreements have received strategic and meticulous attention from competition authorities, particularly in the United States, as part of a broader movement to counter anti-competitive behavior by employers in labour markets. Simply put, a no-poach agreement is essentially an understanding between employers not to hire each other’s employees.

More specifically, such agreements are just one of many types of understandings among employers aimed at reducing competition in labour markets. Employers have also been accused of agreeing not to solicit or even “cold call” each other’s employees, meaning to contact them unexpectedly and without prior solicitation, as well as to fix wages and exchange information on compensation. There are also vertical non-solicitation agreements, for example, between staffing agencies and the companies to which they provide workers.

Horizontal no-poach agreements violate market competition principles, just as market division and price-fixing agreements do on the product market side. In a properly functioning labour market, employers compete for workers by offering higher wages, more favorable working conditions (such as safer workplaces), and benefits (such as flexible shifts). Competition for workers is a form of “buy-side” competition, i.e., competition in input or supply markets. According to economic theory, competition for workers leads employers to increase wages up to the marginal revenue product, representing the efficient or competitive level of compensation.

In order to maintain competitive pressure, workers must retain the freedom to quit and move to competing employers if their current employer does not pay them a competitive wage. When employers agree not to poach each other’s employees, they cut off an important source of competition. Although competition may still occur at the entry level and employees who voluntarily resign and seek new jobs maintain some competitive pressure on employers, the risk of a competitor hiring away employees remains a significant source of competitive pressure in well-structured and functioning labour markets.

Interest in the issue of no-poach agreements among employers dates back to 2010, when the United States Department of Justice sued Apple, Google, and several other Silicon Valley tech companies for agreeing to and implementing agreements designed to limit worker mobility and/or contain personnel costs.

Under U.S. law, no-poach agreements are treated similarly to market division agreements on the product side: they are per se illegal and subject to criminal liability. Additionally, no-poach agreements among competitors that are ancillary to legitimate business initiatives are subject to the rule of reason, as are vertical no-poach agreements.

Thus, the Department of Justice (DoJ) has brought several cases involving no-poach and related anti-competitive labour agreements. In the first case, “United States v. Adobe Systems”, the DoJ alleged that six tech companies—specifically Adobe, Apple, Google, Intel, Intuit, and Pixar—agreed not to make so-called cold calls, which were one of the main methods of recruiting highly skilled labour, to each other’s employees to offer them alternative job opportunities. In a second case, namely “United States v. Lucasfilm Ltd.”, the DoJ alleged that Lucasfilm and Pixar had agreed not to make cold calls, not to make counteroffers under certain circumstances, and to inform the other party if they made an offer to one of its employees. In the third and last case taken into consideration in this dissertation, “United States v. eBay”, eBay and Intuit were accused of entering into a non-solicitation and non-hiring agreement even in cases where one party’s employee approached the other about potential job opportunities. All three settlements required the companies to implement compliance measures (typically including HR training) to effectively prevent participation in similar agreements in the future.

In October 2016, the DoJ’s Antitrust Division and the Federal Trade Commission (FTC) issued guidelines on competition restrictions in the labour market, titled Antitrust Guidance for Human Resource Professionals (the “Guidance”), which states that restrictive competition agreements in the labour market can take the form of: wage-fixing agreements, whereby multiple companies agree on employee wages or other compensation elements, either at a specific threshold or within a determined range; no-poaching agreements, whereby multiple companies commit not to solicit and/or hire each other’s employees, thus not competing in the labour market.

Confirming the DoJ’s position in the cases against tech companies, the Guidance states that “naked wage-fixing or no-poaching agreements”—those not connected and reasonably necessary to the implementation of legitimate cooperation projects or ancillary to concentration operations—are “per se illegal”.

In the European Union, the rhetoric on restrictive agreements among employers in the labour market has not yet reached the prominence it has in the United States. However, there are grounds to believe that—especially in some industrial sectors characterised by the need for highly skilled and thus inherently limited labour—such agreements will soon attract more frequent attention from European competition authorities. It is likely that they will be treated with the same severity as in the United States and could thus represent one of the new frontiers of antitrust enforcement in our continent.

Regarding this, it is worth starting from the famous judgment in the Bosman case (“Union Royale Belge against Bosman”, Case C-415/93), where the European Court of Justice (ECJ) held that rules limiting the free movement of community football players constituted a restriction of competition among football clubs and specifically an illicit allocation of supply sources under Article 101(1)(c), applying the right of free movement to professional football players—and consequently to other athletes—allowing them to transfer without obstacles to another club at the end of their current contract. Specifically, Advocate General (A.G.) Lenz emphasised that it was a restriction of competition by object, and that “contrary to UEFA’s assertion, an agreement is not exempt from the application of EU competition rules because it concerns employment relationships.”

Subsequently, the European Commission reiterated the position taken by Advocate General Lenz, first of all designing that no-poach agreements “are likely to fall under the prohibition of Article 81 as hard-core restrictions because the social sector and the labour market are not exempted from the application of competition rules […]”, and consequently that “an agreement whereby two or more companies commit not to hire each other’s employees could amount to a market-sharing agreement regarding the supply of labour […]”, and conversely that job cartels constitute a clear obstacle to “both job-to-job and geographic mobility of workers” as well as “to the adaptability of workers by limiting their career prospects”.

Relevant insights on wage-fixing (salary containment) can also be found in the preliminary ruling by the Cort of Justice of the EU rendered in June 2009 in case C-8/08, T-Mobile Netherlands.

This landmark case concerned a concerted practice detected by the Dutch competition authority following a meeting between the five main mobile phone operators in the Dutch market, during which they discussed reducing standard commissions paid to subscription resellers. On appeal, the national court referred the matter to the ECJ, requesting, among other things, a ruling on whether a concerted practice not related to retail prices could be considered a restriction by object. The Court responded by stating that determining the anti-competitive object of a concerted practice cannot be conditional on a direct link to retail prices, considering that Article 101(1) TFEU provides that agreements or practices fixing even only “purchase prices” may have an anti-competitive object.

In light of the above provisions, it can be concluded that the labour market, according to competition law and economics, is like any other market, with buyers and sellers. The buyers are employers operating in the labour market and purchasing services (professional knowledge, experience, skills, etc.) from specific types of employees. The sellers, in turn, are the employees entering the labour market, offering their services to employers.

In perfect market conditions, employers compete among themselves to attract labour by offering various incentives such as higher salaries and bonuses, better working environments, and social packages. Healthy competition among employers implies that they make independent decisions regarding employee payment and hiring.

However, if employers engage in a wage-fixing agreement, employees will undoubtedly suffer from wage stagnation or unfavorable working conditions. Signing a no-poaching agreement can limit employee mobility and career growth. Beyond the negative effects on employees, these violations can limit competition in labour markets, negatively impact consumers, and even hinder innovations.

In any case, art. 101(1) of the Treaty on the Functioning of the European Union crystallizes the prohibition of agreements and concerted practices between two or more undertakings (or associations of undertakings) that may affect trade between EU Member States and which have the object or effect of preventing, restricting, or distorting competition in the internal market (i.e., cartel agreements).

In conclusion, all EU Member States have adopted equivalent restriction on cartels in their national competition laws. Although EU law does not explicitly address labour market cartels, as do U.S. and Canadian competition laws, wage-fixing and no-poaching agreements (as well as other anti-competitive agreements among employers) still fall under the general prohibition and are therefore banned. Admittedly, the European Commission has not directly addressed the issue, having only indirectly taken a position. Indeed, in October 2021, Margrethe Vestager revealed the Commission’s intention to investigate these practices in the labour market to prevent the evasion of competition law. However, it is still unknown if, how, and when the Commission’s intention will be implemented.

At the same time, there is no justification for the EU Commission’s silence on this point. The seriousness of the situation is amply demonstrated by the resources that national competition authorities (even within the EU) have spent in combating labour cartels. It is therefore strongly advisable for the European Commission to take a position on these practices, particularly by issuing guidelines, launching awareness campaigns, and fining companies that enter into no-poach and/or wage-fixing agreements.

From another perspective, companies should begin to inform their HR departments and implement internal HR policies for them to meet and ensure full compliance with Article 101(1) TFEU.

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