Navigating The Legal Landscape of No Poaching Agreements and Competition Law

-Naman Aggarwal

Introduction

On 23 June 2023, amendments carried out in 2022 by Canada’s Federal Government in its Competition Act came into effect. One of the changes made by the amendment is the addition of sub-section 45(1.1), which per se prohibits the wage-fixing and mutual no-poaching agreements between the employers, meaning thereby that entering into such agreements is sufficient in itself to generate criminal liability regardless of whether it has any anti-competitive effects or not.

No-poaching agreements refer to the agreements between employers not to solicit or hire each other’s employees. Employers enter into such agreements because they fear their employees may reveal trade secrets or private information to their competitors after joining them, irrespective of the non-compete agreements. Non-compete agreements are generally confused with no-poaching agreements. While non-compete agreements are entered between employer and employees with the purpose of not letting its workforce compete against them with the skill and experience they have gained from the employer, no-poaching agreements take place between executives of two or more employers without the knowledge of employees, not to solicit each other’s workforces. Since employees are ordinarily aware of non-compete clauses in their employment contract, it gives them, though in theory, the opportunity to bargain and negotiate its terms which is not possible with no-poaching agreements.

The competition for talent in a variety of industries, including IT and ITES, banking and finance, e-commerce, and online gaming, is intensifying due to India’s rapid economic expansion. The mismatch between talent demand and supply presents an opportunity for workers to seek higher compensation by changing jobs. Consequently, in order to avoid paying the employees more, employee no-poach pacts, both formal or informal, are finding many takers these days. Hence, in this piece, I will be deliberating upon the question of whether the no-poaching agreements are legal, and can the employers agree not to hire each other’s employees in India?

Link Between No-Poaching Agreements And Competition Law

In a free market, as businesses compete to offer the best range of goods and services at competitive prices to the consumers, similarly, free competition among the employers while recruitment leads to better terms and prospects for the employees, which is otherwise restricted by the no-poaching agreements.

It is a common assumption that the employment/labour market falls under the purview of the competition law. It means employers are expected to follow the competition rules and not engage in anti-competitive activities which affects the labour market such as cartels, restrictive labour practices, wage fixing, exchanging commercially strategic and sensitive information with competitors etc. The economic theory in the case of a perfectly competitive labour market states that there are multiple employees and employers on the supply and demand sides, respectively, thus offering no one the opportunity to negotiate fraudulently. However, no-poaching agreements disturb this arrangement and shift the bargaining power in favour of the employers. Employers ‘collude’ among themselves, which restricts the employees of fair opportunities that would otherwise be available, and here, the competition law comes into play. An agreement prohibiting the employees from switching their jobs against their consent amounts to restraint of trade and can be compared to anti-competitive horizontal agreements. Horizontal agreements refer to any agreement entered into between enterprises engaged in identical or similar trade of goods or provision of services and are presumed to have an appreciable adverse effect on competition under Section 3(3) of the Competition Act. The firms in the labour market operating at the same level of production violates Section 3(3) by entering into a consensus not to hire each other employees, which is presumed to have anti-competitive effects on the market. The agreement also creates exit barriers for the employees by reducing the employment opportunities available to them. Due to the existence of no-poaching agreement, the employers are not free to join the rival firm with better employment opportunities as the exit barrier has been created in the form of no-poaching agreements by not allowing the competing firm to hire the employees.

Validity of No-Poaching Agreements In India

Agreements are governed both by Competition Act, 2002 and Indian Contract Act, 1872. Though the Competition Act regulates only agreements with anti-competitive elements, the Indian Contract Act deals with general agreements. Prior to the enforcement of the Competition Act, no-poaching agreements wholly lie under the purview of Section 27 of the Indian Contract Act. Section 27 states that any agreement in the restraint of trade is void, and no-poaching agreements attract this provision by creating restrictions in the labour market. The Supreme Court ruled in Gujarat Bottling v. Coca-Cola Company that a man has the right to engage in any legal trade, provided that it does not conflict with public policy or interest. It further held that a restrictive covenant that extends past the contract’s term is null and void and not enforceable under Section 27. Further, it observed that the doctrine of restraint of trade is only applicable upon the termination of the employment contract, and this clause is not limited to employment contracts alone but also applies to other types of contracts.

In another case of Pepsi Foods Ltd. and Others v. Bharat Coca-cola Holdings Pvt. Ltd. & Others, a clause in an employment contract prohibited an employee from taking up new work for an entire year after leaving the plaintiff’s employment. The Delhi High Court ruled that Section 27 of the Indian Contract Act is violated by this kind of post-termination restraint under Indian law. These kinds of agreements are invalid, unenforceable, and against public policy. The Court further ruled that a contract cannot limit an employee’s ability to look for and pursue better employment. It is not permissible to issue an injunction to establish “Once a Pepsi employee, always a Pepsi employee”. It would essentially amount to “economic terrorism” or the establishment of “bonded labour.”

These two cases laid down the law that no-poaching agreements are illegal, and employers cannot enter into any agreement among themselves restricting their employees’ right to trade except when there are probable chances that the employee might divulge his employer’s confidential information.

Conclusion

It is well-established that any limits placed on an employee while they are employed are legally binding, but restrictions related to the post-employment period, which are intended to force the person to stay with their current employer or not join a rival one, are void. Traditionally, no-poaching agreements are typically governed by labour and contract law, but they also have an impact on the competition law. Although there are several precedents of regulating poaching under the Contract Act such as Jet Airways (I) Ltd. v. Mr. Jan Peter Ravi Karnik in which the plaintiff poached 16 pilots from its competition airline and then unilaterally changed the terms and conditions of service to their detriment there is no such case of poaching which has been investigated by a court or other authority under the Competition Act, 2002. Even many foreign jurisdictions also have acknowledged in one way or another that no-poaching agreements have anti-competitive effects on the market and thus fall under the purview of competition law. However, CCI, being at a nascent stage, has yet to establish the same for India.

No poaching agreements can be covered under Section 3 agreements of the Competition Act even though the act does not explicitly address them. The Competition Act has a broader scope to deal with no-poaching agreements than the Contract Act. The Competition Act applies to any ‘agreement,’ while the Contracts Act is primarily related to contracts. Furthermore, the only remedy available to a court under the Contract Act is to declare the contract void, whereas penalties can be imposed on anyone found guilty of imposing post-employment limitations on employees under the Competition Act. It would also be feasible for workers in industries where these agreements are typical to bring class-action lawsuits or other legal actions under the Competition Act. Thus, it is high time that the CCI should examine this and prevent the companies from creating adverse effects on the competition in the market by reducing the opportunities available to employees and creating exit barriers.

The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow.