Employment Restraints: The Antitrust Blindspot in No-Poach and Wage-Fixing Agreements
-Aman Yuvraj Choudhary and Aditi Verma
‘Businesses have never done as much hiring as they do today. They’ve never spent as much money doing it. And they’ve never done a worse job of it.’ – Peter Cappelli
Introduction
Antitrust intervention in labour markets has grown steadily as a response to the active use of anti-competitive practices for securing highly skilled and specialised personnel and limiting their movement across competing firms. This article deals with the use of wage-fixing and no-poach agreements in the labour market and antitrust concerns therewith. Wage-fixing agreements are arrangements wherein competitors fix the wages for particular positions which are relatively at the same level in the organisational structure of each competitor. A no-poach agreement is an agreement between competitors not to poach (or hire) employees of the other party. These agreements eliminate labour mobility and permeability in the labour market and restrict a competitor’s ability to expand their operations, thereby limiting output. It is pertinent to note that the Competition Commission of India (CCI) has never previously taken cognizance of employment restraints like no-poaches or wage-fixing. This regulatory gap must be examined in the backdrop of antitrust’s role in promoting free and equitable movement of labour.
Recent developments in India highlight the urgency of this issue. Leading private sector banks in India have agreed to an informal no-poach agreement with regards to junior-level employees to stem attrition. In another development, the Adani Group has executed a no-poach agreement with Reliance Industries. Leading E-sports firms, in the gaming industry, have also been contemplating an informal pact capping salaries to stem poaching. These developments are just a tip of the iceberg.
In light of the above, this article examines the economics and antitrust concerns associated with wage-fixing and no-poach agreements, analyses the treatment of these agreements in mature jurisdictions and in India, discusses the applicability of the defence of ancillarity; proposes how these horizontal agreements are actionable under the Competition Act, 2002 (Competition Act); and concludes with policy suggestions aimed at addressing this emerging challenge in the Indian labour markets.
The Economics and Antitrust Concerns of No-Poach and Wage-Fixing Agreements
A no-poach agreement between competitors prevents them from hiring each other’s employees. They are often used by employers to deal with the ‘hold-up problem’ to prevent employees in high-stake executive positions from walking away with trade secrets. Firms get the obvious advantage of retaining their employees while sabotaging the recruitment prospects of competitors. With limited options for viable and gainful employment, any worker would be ultimately forced to remain with their original employer who can easily leverage their bargaining power by imposing unconscionable and exploitative terms of employment over employees.
Antitrust jurisprudence in the US treats labour market allocation like product market allocation. The parallelism between a product and a labour market allocation operates on the logic that just as a producer is restricted from servicing the needs of a competitor’s customers, under a no-poach agreement the competitors are restrained from hiring the employees of one another. Thereby, the competing firms allocate the labour market.
On the other hand, under a wage-fixing agreement, competitors determine the wages of the workers in an industry. Wage fixing agreements are similar to no-poach covenants owing to their anti-competitive effects on labour mobility. When two competitors agree on a certain level of wages it inevitably leads to artificial suppression of wages. Without meaningful choice for employment amongst competitors, all of whom offer the same wages to employees, leaves the employee with no impetus to forgo their present employers. Often, no-poaches and wage-fixing agreements are executed in a clandestine manner such that employees themselves are unaware of such agreements.
The paper titled ‘No Poaching Agreements and Antitrust Enforcement’ by Christine Piette Durrance offers an economic analysis of no poaching agreements and a theory of damages. The paper demonstrated through an economic model, the similarity of a market with no-poach agreements to that of a monopsony setup (where there is only one buyer in the market) which defaults towards suppression of wages for workers in the long run as a by-product of market dynamics.
A study titled, ‘Interfirm mobility, wages and the returns to seniority and experience in the United States’ by Moshe Buchinsky et al., studied returns to seniority and assessed the effect of switching firms on compensation throughout the workers’ careers. The study found wage growth to be associated with increases within the firm or by switching to a new firm. Even the option for a worker to move to another firm for a better compensation acts as leverage for the worker to negotiate wage increases.
A study by Matthew Gibson titled ‘How Major Tech Firms Used Illegal “No-Poach” Agreements to Control Workers’ Salaries’ assessed the impact of no-poach agreements on salaries, stock bonuses and job-satisfaction in the backdrop of the United States Department of Justice (DOJ) investigation against no-poach agreements among Adobe, Apple, eBay, Google, Intel, Intuit, Lucasfilm, and Pixar. The study examined the difference between the salary levels in the tech industry of colluding firms and non-colluding firms and found that salaries in the former fall below the latter by approximately 6%. After termination of the no-poach agreements, the study found that the salaries offered by colluding firms converged with that of non-colluding firms. The study concluded that the illegal no-poach agreements among Silicon Valley technology companies “substantially depressed” worker compensation.
These agreements, all in all, affect labour market competition and the determination of wages. No-poach and wage-fixing agreements carry significant downstream effects on innovation and productivity across the economy. When employees are artificially tethered to their current employers, the natural flow of human capital that drives innovation is disrupted–dubbed as a “promise not to innovate” by Margarethe Vestager, the Executive Vice President of the European Commission. This restricted mobility prevents the pollination of ideas and expertise that typically occurs when skilled workers move between firms. These agreements create a disincentive for workers to invest in skill development, as the artificial wage ceiling limits the returns on their human capital investments. From a productivity standpoint, the lack of competitive pressure on wages reduces employees’ motivation to maximise their output, while employers, insulated from wage competition, have less incentive to invest in efficiency-enhancing technologies or workplace improvements.
What’s happening in more mature jurisdictions?
United States
The US has a very strong stance on “labour antitrust”. The Department of Justice, in 2010, settled with multiple tech companies, including Apple, Google inter alia in legal action against their mutual agreement to refrain from recruiting employees from “off-limits” rivals.
The Antitrust Guidance for Human Resource Professionals was later devolved in 2016 which allowed the DoJ to take criminal actions against naked no-poach and wage-fixing agreements. In pursuance of the Guidance, the DoJ charged a dialysis provider DaVita for entering into a no-poach agreement with its competitors in United States v. DaVita alleging that the enterprise had allocated workers through a market allocation agreement with competitors. The case eventually resulted in an acquittal. In United States v. Neeraj Jindal, it was alleged that the owner of a physiotherapist staffing company conspired with a competing agency to lower the wages of the therapists under contract. This case, too, ended in acquittal. The first criminal conviction by the DoJ came in United States v. Hee wherein the defendant, another staffing agency, pled guilty to conspiring to not recruit the other’s staff and to fix their wages.
The Seventh Circuit, in late 2023, revived the allegations against McDonald’s of prohibiting franchisees from hiring workers from other McDonald’s franchises. The Supreme Court has recently declined to review the revival of the allegations and allowed the case to continue. In another similar case, Arrington v. Burger King Worldwide, regarding no-poach agreements between franchisees of Burger King, the Eleventh Circuit rejected the argument that Burger King and the franchisees constituted a single entity and that no-poach agreement inter-se could not constitute concerted action under Section 1 of the Sherman Act, 1890. The Court found that such an agreement could give rise to liability and revived the suit.
In Aya Healthcare Servs., Inc. v. AMN Healthcare, Inc., the Ninth Circuit found an impugned no-poach agreement between healthcare staffing agencies that were involved in placing travel nurses in hospitals to be reasonable and ancillary to a legitimate transaction. It distinguished between “naked” and “ancillary” restraints and observed that non-solicitation agreements are not per-se violation of the Sherman Act inviting a “rule of reason” analysis.
This trend indicates that the US antitrust authorities maintain a strict but balanced stance in labour antitrust.
European Union (EU)
A guidance has been issued by the European Commission (EC) to effectively bring no-poach agreements and wage-fixing agreements under Article 101 thereby subjecting it to by-object treatment.
In pursuance of the Portuguese Competition Authority’s (AdC) released a best practices guide policy paper concerning labour antitrust. Further in late 2022, it issued a Statement of Objections against laboratory business associations for agreeing to a no-poach. Earlier that year, the AdC sanctioned a prominent football league along with 31 clubs for entering in a no-poach agreement barring them from hiring footballers who terminated their contract owing to Covid-19.
In early 2023, the Ministry of Economy, Industry and Digital Affairs fined parties of a merger in the metallurgical industry for agreeing to no-poaches. In 2017, the Court of Appeals of Paris fined professional unions of modelling agencies for fixing model fees, wages and agency fees.
In 2023, the Greek Hellenic competition authority acted against an association for determining the minimum wages of elevator maintenance and installation staff. The Spanish Catalan competition authority in 2023 fined private educators forming part of an association for agreeing not-to-call teaching staff in the employment of competitors. In most EU countries staunch action is being taken against no-poach and wage-fixing.
UK and Canada
In the UK, restrictive covenants like non-competes have been scrutinised through the lens of employment law. The Competition and Markets Authority (CMA) released its report and found that restrictive covenants may “distort labour supply and production decisions, reducing economic efficiency and possibly worsening consumer outcomes”. The CMA has also placed wage-fixing under intense antitrust scrutiny and has categorised it as a hardcore restriction.
In Canada, no-poach agreements and wage-fixing are tried criminally. In addition to criminal prosecution, class-action lawsuits can be filed to claim damages.
How has the India Inc. dealt with these issues?
It is pertinent to mention that the CCI has never dealt with no-poach or wage fixing agreements. As a matter of trend, the CCI has refrained from adjudicating upon negative covenants in employment contracts by dismissing them as employment or contractual issues.
In Kapoor Glass v. Schott Glass, the issue of predatory hiring and poaching of employees was raised. The issue was not dealt with for want of a particular charge under the Competition Act. However, the CCI clarified its stance on labour mobility and observed that labour is a key factor of production the movement of which must be unrestricted from employer to employer.
The issue of predatory hiring was raised in Air India v. InterGlobe Aviation Ltd. It was alleged that Air India was incurring substantial costs on the training of its flight operators and pilots, only to lose them to the predatory recruitment practices of InterGlobe. The information was dismissed on the ground that the matter seemed “more of an employment issue than a competition issue”.
The Defence of Ancillarity: Not Enough
Globally, the ‘ancillary restraints’ doctrine is one of the anvils to test the justifiability of negative employment covenants. Essentially, the negative restriction so imposed must be ancillary and indispensable to achieving a legitimate object in an agreement or merger. This approach was also recommended by the CCI in its guidance note of 2017 on non-competes which addressed the treatment of non-compete restrictions in combinations.
However, the defence of ancillarity is not a sufficient defence as it only requires two elements to enable justification of the negative restriction: ancillarity and indispensability. The authors advocate that such transactions are further put thoroughly through the rule of reason test. The Supreme Court in Tata Engineering and Locomotive Co. Ltd has highlighted three determinants for the rule of reason test–facts peculiar to the business, the conditions pre and post-restraint, and the effect of such restraint. These determinants must be heeded to.
Denouement
Employment restraints like no-poach or wage fixing agreements can also be treated by civil courts as agreements “in restraint of trade” under Section 27 of the Indian Contract Act, 1872. However, only the parties to such an agreement would be empowered to vitiate it since Section 27 provides for in personam proceedings as per the principle of privity of contracts. This provides impetus for the CCI to bring these agreements within the fold of the Competition Act for effectively adjudicating them. Further, there must be a reconciliation between Section 27 of the Contract Act and Section 3 of the Competition Act with respect to adjudication of claims.
Actionability under the Competition Act
Since no-poach agreements are horizontal agreements between competitors, as per Section 3(3) of the Competition Act they carry a presumption of causing appreciable adverse effects on competition (AAEC) within the market for labour. No-poaches allocate the market for labour. A no-poach essentially creates a division in the market: between workers who can be hired and those which cannot. Therefore, when firms agree not to poach the employees of their competitor, they cordon off their own workers and effectively pull them out of the open market for labour.
Wage fixing agreements are explicitly prohibited as per the Act. As per Section 3(3)(a) of the Act, any horizontal agreement which determines the sale or purchase prices of services is presumed to cause AAEC. In the labour market, a wage fixing agreement is undertaken to determine the purchase prices (wages or salaries) of the services rendered by the employees. Such a conspiracy is dangerous for competition because the determined wages are artificially inflated or suppressed and are not induced by the operation of the free hand of the market, or by the forces of demand and supply.
In line with antitrust treatment of horizontal agreements under Section 3(3), wage-fixing and no-poach agreements naturally carry a presumption of causing AAEC within the labour market. The mechanism for action is already in place but what remains asleep is the CCI.
The CCI must wake up.
The CCI must take an active role in curtailing such agreements, recognizing the necessity of conserving labour mobility. This is also in line with the CCI’s Schott Glass judgement, wherein it was clarified that labour as a factor of production must be allowed to move freely within the market.
The CCI’s stance of sweeping these agreements under the rug of employment issues has enabled the rampant use of such agreements. If the CCI so chooses, under Section 61 of the Act, it may oust the jurisdiction of civil courts which have conventionally dealt with negative restraints in employment contracts in in personam proceedings. This approach will give an aggrieved party a ground to approach the CCI alleging violation of Section 3 of the Act, rather than approaching a civil court. The CCI is capable of adjudicating the issue in an in rem proceeding in this regard and of giving appropriate remedy. Further, it is imperative that the policy makers recognize the harmful effects of restrictive covenants on the labour market. The CCI must bring employment restraints in the labour market within its ambit. It is high time that the CCI acknowledges the need for a regulation of employment restraints and brings our antitrust laws up to speed with global developments.
The authors are students of National University of Study and Research in Law.