Steptoe | Poaching: The Biden Executive Order and Employment Restrictions in Europe

Introduction

No-poach and wage-fixing agreements – arrangements between companies seeking to prevent or limit the hiring of each other’s employees, or to suppress the wages and/or benefits of their respective current employees are not only currently under the spotlight in the US, but have also been subject to scrutiny by antitrust authorities in the European Union (EU), albeit to a more limited degree. These antitrust infringement decisions have mostly been taken by EU Member State national competition authorities (NCAs), rather than by the European Commission (EC) (the foremost enforcer of EU competition law). The US antitrust regime will be relevant to companies from third countries that have US subsidiaries or that participate in joint ventures or private equity investments in the US, but this alert focuses on the emerging body of EU and Member State law relating to anti-competitive labour practices and highlights the need for those companies with European operations or investments to take note of them. Potential liability for EU antitrust failings may extend to a number of circumstances, including where the parent holds only a minority stake[i], potentially coupled with nominee directors sitting on subsidiary company boards, and even where a buyout or private equity firm has no involvement in, or awareness of, the alleged wrongdoing[ii]. As with labor-related restrictions in the US, the growing use of fines by EU Member States for violations of competition law through no-poach, no-hire, wage-fixing and staff data sharing calls for increased coordination between sales managers, human resource departments, and antitrust legal and compliance officers.

With the expansion of US antitrust enforcement in this area, including into the criminal arena (at one time, the Department of Justice was more likely to treat these types of violations as civil) and the new administration’s clear directive in the recently issued Executive Order for DOJ and FTC to more closely scrutinise certain employment practices that may have an anti-competitive effect on labour markets, there is an increasing likelihood that the EU antitrust enforcers will follow suit. Private actions for damages have also become increasingly prevalent in Europe. In addition, and although no longer a part of the EU, the UK can prosecute no-poach and wage-fixing agreements as criminal offences[iii] and, amongst other potential penalties, affected directors can be disqualified from acting on boards[iv].

Businesses should review any agreements or understandings with competitors – formal or informal – that may have the effect of restricting the hiring of rivals’ employees or the hiring of their employees by rivals. They should also assess whether they are engaged in improper sharing or benchmarking information relating to their employees’ salary levels, bonuses, incentive schemes and hiring levels (or those relating to competitors) and whether they have agreed to wage caps or have sought salary alignment with other employers. Given the new Executive Order’s direction to re-examine the current DOJ/FTC guidance[v] permitting the sharing of such employment-related data even through third parties and the potential heightened enforcement scrutiny in this area that will likely follow, companies should be sensitive even to this historically acceptable practice. Moreover, the list of competing employers with which a company should avoid engaging in these forms of collusive practice can extend beyond direct business competitors and the assessment should be undertaken by reference to all those companies with which a business competes for skilled staff, which will make the evaluation more exacting.

The Structure of EU Competition Law

EU competition law (and the competition laws of EU Member States) can apply to agreements between competitors relating to no-poach, no-hire and wage-fixing arrangements and to an employee information exchange. It should be noted that jointly agreed non-solicitation clauses may be permissible if directly related and necessary to implement a concentration^[vi], or if the relevant restriction is ancillary to a joint venture[vii]. Accordingly, post-termination non-compete or non-solicitation which are narrowly drawn in terms of scope, duration, and geography may still be permissible. The exchange of employment-related information as part of a benchmarking exercise may also be permissible, provided that it is structured in a competition law compliant manner, with safeguards regarding matters such as data aggregation and anonymisation.

As regards anti-competitive arrangements that do not fall within these exceptions, one of the reasons for the more modest development of European law in this area is the structure of the two principal EU provisions prohibiting anti-competitive practices: (i) Article 101(1) of the Treaty on the Functioning of the EU (TFEU); and (ii) Article 102 TFEU and the national laws that mirror them with respect to anti-competitive practices with effects within a given EU Member State.

• Article 101(1) TFEU prohibits agreements or concerted practices between undertakings and decisions by associations of undertakings which may affect trade between EU Member States and which have as their object or effect the prevention, restriction or distortion of competition in the EU.
• Article 102 TFEU prohibits any abuse by one or more undertakings of a dominant position within the EU (or a substantial part of it), that may affect trade between EU Member States.

In each case, these prohibitions apply to ‘undertakings’, a concept that encompasses a wide range of entities engaged in commercial or economic activity, but which excludes workers who are incorporated into the undertaking that employs them[viii] and who do not act independently on the market[ix]. Thus, neither Article 101 nor Article 102 TFEU will apply to a bilateral agreement between an undertaking and an employee, nor will they apply to collective bargaining arrangements with workers’ representatives. The concept of an undertaking does include the economic activities of self-employed persons and restrictive covenants affecting them have been analysed under Article 101(1) TFEU[x]. Although Articles 101(1) and 102 TFEU do not apply to agreements entered into by employees with undertakings that employ them, it should be borne in mind that restrictive covenants accepted by employees may be struck down on public policy grounds under national restraint of trade doctrines or labour laws.

EU Policy Statements

The EC has not made any policy statements about antitrust enforcement regarding employment practices. However, NCAs have begun to do so. In April 2021, the Portuguese Competition Authority published an Issues Paper entitled ‘Labour market agreements and competition policy’[xi]. The Issues Paper provides a good overview of the theories of harm and reviews a number of the NCA decisions in this area. Harms associated with no-poach, no-hire and wage-fixing agreements include both social harms and competitive ones. The latter category includes a decrease in job-match quality and allocative inefficiency, a decrease in competition between employers in downstream markets in terms of volumes of sales, prices, product quality and innovation, and a decrease in incentives to invest in human capital.

National Enforcement

No-poach or no-hire agreements between companies competing for skilled staff (not necessarily for deployment in exactly the same market) typically occur where there is a shortage of specialist workers and where employers want to preserve the investments made in staff training. They may also be aimed at suppressing staff wage increases. An example of an attempt to keep down costs and to protect training investments is the Dutch judgment[xii] of 2010 relating to an agreement between fifteen hospitals entitled “Working together, training together”. This agreement provided that, as between the hospitals that were parties to it, when an anaesthesiologist or operation assistant ceased working for one hospital and became a self-employed agency worker, he or she would face a 12-month wait before being engaged by a hospital. There were also wage-fixing provisions, with the hospitals agreeing to cap the overtime pay for the anaesthesiologists and operation assistants at a level equal to 75% of the employees’ hourly wages. The hospitals were located in the provinces of Zeeland, North Brabant and Limburg and the agreement triggered an initial complaint to the Dutch competition authority and subsequent civil proceedings. The Court of Appeal held that the agreement infringed Dutch competition law and ordered the hospitals to suspend the wage-fixing and waiting period provisions, or they would face fines.

Also in 2010, the Spanish competition authority adopted an infringement decision against eight road transport freight forwarding agents[xiii] who, as part of an overall alignment of their market strategy and with a view to passing on costs and raising prices, had entered into an agreement not to hire employees working for a competitor without that rival’s prior approval. The cartel arrangements were considered to be an egregious infringement by object, prohibited by both Article 101 TFEU and by the equivalent Spanish competition law prohibition. The Spanish competition authority imposed fines on the parties totalling € 14,127,000.

The Spanish competition authority took a further labor-related infringement decision in 2011 relating to a cartel in the sale of products for professional hairdressers[xiv]. It found that eight manufacturers of cosmetic products for professional hairdressers had engaged in: (i) the exchange of current and future sensitive commercial information as to the salaries, fees and daily expenses paid to each of their sales team employees and had shared sales team employee numbers; and (ii) a no-poach agreement, with the cartelists agreeing not to cold call or hire each other’s sales employees, without prior consent. As before, the labor-related arrangements were assessed in the context of a wider cartel and not as a stand-alone agreement. The cartel was considered an infringement by object, one prohibited by Article 101 TFEU and by national competition law and resulted in fines totaling € 60,907,000. The non-domiciled parent companies of the Spanish cartelists were jointly and severally liable for € 47,233,981 of the fine. € 900,000 of the total fine was imposed on the Spanish National Association of Perfumery and Cosmetics.

In 2014, the Croatian competition authority brought proceedings against Gemicro, a company active in providing specialized IT support to leasing companies and other forms of financing, for an abuse of a dominant position under national competition law. The Croatian competition authority had initiated proceedings on the basis of a complaint alleging Gemicro had made the conclusion of contracts with leasing companies conditional on the acceptance of an obligation not to engage competing service providers that had recruited former Gemicro employees. This ban applied for the duration of the contract. In 2015, Gemicro gave commitments that it would cease imposing this obligation in future contracts and would eliminate it from existing ones. The Croatian competition authority accepted these commitments and closed the procedure[xv].

In a truly competitive labour market, companies would determine wages and employment conditions independently. Wage-fixing between competitors is the fixing of input costs and involves an exchange of sensitive information that raises the same concerns as more traditional exchanges of commercially sensitive information (such as prices or production costs). Recent cases confirm this analysis. For instance, in 2017, the French competition authority fined three leading PVC and linoleum floor coverings manufacturers in France, and the professional floor coverings association, the SFEC. The French competition authority found that the manufacturers had entered into an agreement relating to many aspects of their commercial policies, including prices, and constituting a plan aimed at “drastically reducing, if not completely eliminating, competition in the manufacturing and marketing” of PVC and linoleum flooring products and at stabilising their market positions[xvi]. The parties also agreed to exchange, under the auspices of the SFEC, detailed confidential information allowing them to adjust their commercial behaviour. This included the exchange of confidential information related to staff salaries and bonuses and a gentleman’s agreement not to solicit each other’s employees[xvii]. The cartel was considered an infringement by object, prohibited by Article 101 TFEU and by national competition law and fines totalling € 302,300,000 were imposed.

To emphasise the point made earlier regarding the application of the antitrust rules to no poaching arrangements or understandings in the private equity arena, the Central Bank of Ireland launched in 2018 an investigation of alleged no poaching arrangements between several Italian-headquartered asset managers based in Dublin.[xviii]

In June 2020[xix], the Portuguese competition authority issued a recommendation to the Portuguese Football Federation (FPF) not to impose a maximum limit on the total salary of each club participating in the Women’s League, warning that this could restrict competition and might attract a fine under Portuguese competition law. The Portuguese competition authority stated that a salary cap could reduce the quality of football matches and competition and could harm football players by reducing the ability of players to seek better compensation in a rival club.

In April 2021[xx], the Portuguese competition authority issued a ‘statement of objections’ (a non-determinative indication of grounds for an infringement decision) relating to a no-poach agreement that was the result of a resolution of the Portuguese Professional Football League (LPFP), implemented by 31 sports clubs participating in the 2019/2020 season of the First and Second Professional Football Leagues. The case was opened by the Portuguese competition authority in May 2020 and an interim measure was adopted, ordering the LPFP to suspend the resolution and the operation of the agreement. The LPFP resolution was an attempt to create contractual stability in the wake of the economic effects of COVID-19. The agreement recognised that teams and players would need to agree to wage reductions, with some teams potentially needing to terminate player contracts unilaterally. The agreement provided that a player who terminated his contract for COVID- 19 pandemic-related reasons could not be hired by another club in the First or Second Professional Football Leagues in Portugal, and could only be hired by a club if it was located outside of Portugal or if it participated in a competition below the two main professional leagues in Portugal. This agreement was regarded as harming consumers by preventing the hiring of players that could fill gaps in teams, reducing the quality of football matches and limiting competition between clubs. Any final infringement decision may well impose fines.

In December 2020[xxi], the Hungarian competition authority decided that certain provisions in the ethical code of the Association of Hungarian HR Consulting Agencies (Association) were unlawful, as they sought to restrict competition among its members. The internal rules of the Association fixed minimum fees and other conditions with respect to the recruitment services provided by its members for a period of seven years, beginning in 2011. Members were also prohibited from soliciting the employees of other members and were prohibited from recruiting employees who had previously been employed by another member. The internal rules also limited the cases where members were permitted to use the data and CVs of employees working for another undertaking when submitting tenders in the public procurement of recruitment services. These no-poach and no-hire clauses, together with the restriction on the use of employees’ CVs, were intended to support the market allocation aims of the internal rules. The proceedings also involved twenty-three foreign and Hungarian undertakings. The Association was fined HUF 1 billion on the basis that, if the Association failed to pay, its members would be jointly and severally liable (in proportion to their revenues in the previous year) to pay it.

In April 2021, the Polish competition authority began proceedings against the Polish Basketball League (PBL) and sixteen of its member clubs[xxii]. The Polish competition authority believes that the clubs unlawfully agreed on arrangements relating to basketball players’ employment contracts at the outset of the COVID-19 pandemic in Poland. They agreed to terminate players’ contracts on the early conclusion of the basketball season in March 2020, due to the pandemic, and also agreed to withhold the players’ salaries payable after that date. The Polish competition authority is also of the view that the PBL and the clubs unlawfully exchanged sensitive information regarding salaries. These arrangements enabled the clubs to reduce the players’ salaries, without facing the threat that players might move to another club as a result. These arrangements also eliminated competition between the clubs for the best players. The Polish competition authority is apparently liaising with the Lithuanian competition authority, which began an investigation in April 2020 into a national basketball league and its club members regarding concerns that they held meetings to determine player salary issues. It is also believed to be consulting with the EC.

EC Enforcement

Although the EC has not yet investigated or fined undertakings for no-poach, wage-fixing or information sharing practices, it should be noted that the sharing of confidential information (even on a one-off basis) such as information regarding the commissions paid by competitors to their dealers[xxiii] can cause companies to align their commercial strategies and will be regarded as an established ‘by object’ infringement attracting fines. The EC has also concluded[xxiv], in a decision upheld by the EU Court of Justice[xxv], that an agreement between cartelists to poach key employees of a non-cartelist in order to subvert its attempts to sell into a cartelised market was a violation of Article 101(1) TFEU.

Businesses should therefore be aware that NCAs enforcing Articles 101 or 102 TFEU or their national laws and any EC enforcement of EU competition law will likely result in labour-related antitrust infringements being sanctioned and subject to a fine. The anti-competitive practices outlined above should be treated as an established serious form of competition law infringement. There will be no scope to argue a lack of anti-competitive effects once a ‘by object’ infringement has occurred and, if compliance proves ineffective, the only option for a company is to seek to take advantage of any leniency or settlement arrangements that are then available to it. Of course, the company may also face costly civil liability by way of parallel or follow-on litigation.

HR professionals and managers in charge of recruitment should be systematically included in antitrust compliance programmes and initiatives, and vulnerable HR practices should be covered in competition law compliance materials, which should apply to all corporate entities in which there is a significant equity participation. It may also be appropriate to conduct antitrust due diligence or internal audits on a periodic basis to ensure that businesses are compliant, and remain compliant. If you feel that further steps might be warranted in the form of more specific guidance, conducting further internal reviews or risk mapping assessments, we will be happy to assist you in devising and implementing an appropriate action plan.

Authors:

• Paul Hughes
• Charles Whiddington
• Michael L. Weiner
• Patrick F. Linehan
• Zoe Osborne
• Simon Hirsbrunner
• John J. Kavanagh

Compliments of Steptoe & Johnson – a member of the EACCNY.