In recent years, competition authorities in the US have focused quite heavily on tackling anti-competitive practices in labour markets, and have taken several actions on this front. In terms of the situation in Europe, whilst the momentum has not quite picked up as it has in the US, the EU Commission (“Commission”) has also expressed a growing interest in ensuring fair competition in labour markets.

In fact, the Commission recently published a Competition Brief on Labour Markets (“Brief”), in which it assesses the harmful effects of wage-fixing and no-poach agreements, delves into their treatment under EU competition law, and outlines the Commission’s ‘unofficial’ stance towards such practices.

What are ‘wage-fixing’ and ‘no-poach’ agreements?

In its Brief, the Commission focuses on two main practices adopted by some employers: no-poach agreements and wage-fixing agreements.

In wage-fixing agreements, two or more employers agree to fix wages or other types of compensation or benefits for employees. Employers can either agree to fix wages at a specific rate, or may set salary ranges for specific categories of employees.

In no-poach agreements, on the other hand, two or more employers agree not to ‘steal’ employees from one another. These agreements range from practices such as ‘no-hire’ agreements, whereby employers outright agree not to employ individuals employed with the other party, to softer forms of no-poach agreements such as non-solicit agreements, whereby employers agree not to actively poach the other party’s employees. No-poach agreements may feature as written clauses in certain agreements, such as labour supply agreements, franchisee agreements and even share purchase agreements.

What makes these agreements harmful?

Wage-fixing agreements, which are often not known to employees, result in lower wages for employees and serve to discourage employees from moving to competitors as they will not be offered a better salary package.

The harm in no-poach agreements is best appreciated if looked at through an economic lens. The Brief argues that the harmful effects of no-poach agreements are:

1. Reduction in employees’ wages as competing firms are prohibited from poaching each other’s employees, which is typically done by offering an employee a higher salary or benefits;
2. Inefficient allocation of resources as employers are prevented from hiring the ‘best talent’ for their firm;
3. Reduction in labour market dynamism and innovation;
4. Slower GDP growth.

Compatibility with EU Competition Law

EU competition law classifies restrictive agreements into two categories, ‘by object’ or ‘by effect��. The ‘by object’ category focuses on those harmful practices which, at face value, reveal a sufficient degree of harm to competition.

In its Brief, the Commission takes the view that wage-fixing and no-poach agreements generally qualify as restrictions ‘by object’ under Article 101 of the Treaty on the Functioning of the European Union (“TFEU”). The Brief explains that these types of agreements are akin to price fixing and supply-source sharing practices which are both explicitly prohibited under Article 101(1) TFEU.

The Brief recognizes that these agreements may, in certain cases,
be in place for legitimate objectives such as to protect the investments made by an employer in a particular employee (such as investing in training courses for an employee), or even to protect intellectual property or trade secrets. However, the Brief highlights that such legitimate objectives do not take away from the ‘by object’ classification of these agreements, arguing that these legitimate objectives can often be achieved through less restrictive means, such as through non-disclosure agreements, non-compete clauses, or the use of gardening leave.

Can these clauses be justifiable?

Although these types of agreements generally present, according to the Commission, a sufficient degree of harm, no-poach and wage-fixing agreements may be legitimate and lawful. The Brief considers that these agreements may be acceptable where there are no other ‘less restrictive’ means available to achieve the intended result, and the scope of the clause does not extend to all employees but is strictly limited to certain employees.

It has also been argued that such agreements can have pro-competitive effects as they may, to give one example, enhance an employer’s incentive to invest in training for its employees (as it would not need to worry about losing said employee to its competitors). According to the Commission, this argument however seems unlikely to hold water, given that such agreements often lead to employees’ wages being artificially lowered.

Concluding remarks

Whilst the Commission has so far, not taken an official and definitive position on wage-fixing and no-poach agreements, both the Commission and national competition authorities are increasingly considering restrictions on the labour market as an enforcement priority. Certain national competition authorities (such as the French and Spanish authorities) have already taken the view that these agreements should be classified as ‘by object’ restrictions.

The Brief, and some of its positions, are yet to be finally tested by the Courts of Justice of the European Union.

It may also be useful if companies were to carry out routine compliance training on competition law for companies, which should also involve HR personnel, to ensure that decisions taken which relate to employees comply with competition law, and will help companies steer clear of hefty penalties and reputational damage resulting from non-compliance.

Author: Chris Grech, Nina Fauser

This article was first published in The Times of Malta on 07/07/2024.