Labour related agreements in the European Commission’s antitrust spotlight: New Policy Brief on Antitrust in Labour Markets

Until now, the European Commission's (EC) antitrust focus on labour-related issues has been timid. This may soon change. The EC has recently published a policy brief on labour markets, explaining that in its view, wage-fixing and no-poach agreements have, by their very nature, the potential to restrict competition. Hence, they will likely be treated as "by object" restrictions. The brief also expresses a sceptical view on any potential justifications available under EU competition law. Whilst indicating most enforcement will likely continue to occur at the national level, the policy brief is a sign that the EC is ready to use its powers to tackle anti-competitive behaviour in labour markets.

Why does the EC think wage-fixing and no-poach arrangements are potentially harmful?

The EC defines wage-fixing agreements as arrangements pursuant to which employers agree to fix wages or other types of compensation or benefits. No-poach agreements comprise of all arrangements in which employers agree not to hire each other's employees, including passive or active hiring.¹ The term employee includes also "false self-employed workers", i.e., service providers in a situation comparable to that of employees.

The EC states that wage-fixing sets wages at the monopsony wage level via a reduction of labour demand with the side effect of reducing output and increasing downstream prices to the detriment of consumers.

For no-poach agreements, the EC explains that such arrangements are likely to reduce labour market dynamism with resulting negative effects on employee compensation, firm productivity and innovation. In particular:

• The agreements reduce wages because competing firms have less incentives to increase wages to attract new employees or motivate the existing workers to stay. No-poach agreements are typically secret, meaning employees are unaware of them and are therefore unable to negotiate compensation for the reduced job prospects.
  
  They prevent efficient allocation of productive employees to productive firms. Declining job reallocation rates have been linked to declining productivity and hence slower GDP growth.
• The agreements may have negative effects on innovation since employees do not switch to the employers where they are most valuable.

How does the EC classify wage-fixing and no-poach agreements under EU competition law?

Up until now, the EC's stance on the classification of labour market agreements was unclear due to the lack of EC's enforcement in the area. The EC now gives an answer to this by confirming in the brief that it regards both wage-fixing and no-poach agreements as restrictions of competition "by object", i.e., those arrangements have, by their very nature, the potential to restrict competition. In practice, this categorisation means that the EC does not need to demonstrate any actual effects of those labour arrangements on the market for the purposes of applying EU competition law. The conclusion with respect to wage-fixing agreements is probably unsurprising as the wage-fixing agreements are also classified as "by object" restrictions under the revised EU Horizontal Guidelines.² By contrast, the same categorisation of no-poach agreements seem highly questionable as in certain circumstances, they can have pro-competitive effects at least in certain circumstances (see below).

The EC recalls the settled case law according to which the concept of a "by object" restriction must be interpreted narrowly. It needs to be analysed whether such agreement presents a sufficient degree of harm to competition taking into account the agreement's content, objectives and economic and legal context of which it forms a part. The EC further recalls that if restrictions come within one of the categories listed in Article 101 TFEU, the analysis of economic and legal context must be limited to what is strictly necessary. The EC states that "labour markets agreements are akin to a buyers' cartel since wage fixing falls within the language of Article 101 (1) (a) as a form of purchase price fixing and no-poach falls within the language of Article 101 (1) (c) TFEU as a form of supply-source sharing. Past Commission practice and EU case law have treated purchase price fixing and supply-source sharing as restrictions of competition by object." When analysing the legal and economic context, the EC takes into account that "labour is a fundamental factor of production, and the ability of talent is a key competitive parameter. " The EC also considers that parties entering into the labour market agreements suggests in itself that there is a talent scarcity.

Are the labour related arrangements between companies an antitrust issue only if parties compete both in labour and product markets?

The EC's analysis focuses on demonstrating a sufficient degree of harm to the competitive process of the labour market in question. The EC says that it is unnecessary to conduct a similar analysis in downstream product markets. The EC explains that once parties compete for labour, it is not necessary that they also compete in any product market. Therefore, this suggests that the EC will analyse the arrangements in the context of their impact on the relevant labour market only, regardless of how companies are positioned in the downstream market.

Are there any efficiencies or justifications for the labour market agreements?

According to the EC, both wage-fixing and no-poach deals can qualify as ancillary restraints under strict conditions or be exempted under Article 101 (3) TFEU.

Wage-fixing agreements

With respect to wage-fixing agreements, the EC states that it seems difficult to argue that such arrangements may even in principle have pro-competitive effects. The EC does not elaborate on this much further, suggesting that a scenario under which a wage fixing agreement can be justified is according to the EC very unlikely to happen in practice.

No-poach agreements

There seems to be more wiggle room for no-poach deals. The EC acknowledges that they can have pro-competitive effects including (i) protecting firms' incentives to invest into employees' trainings without concerns that they will later leave for another company (so called an "investment hold up" problem), or (ii) protecting non-patent IP rights. However, according to the EC, net efficiencies with respect to the investment hold-up issue are uncertain. In any event, the EC considers that the protections can be achieved differently without breaching antitrust law. These are for example, non-disclosure agreements, the obligation to stay with an employer for a minimum amount of time, a proportionate repayment of training costs, gardening leave or non-compete obligations in individual employees' contracts. Regarding the non-compete clauses, the EC says that such agreements in individual employee contracts fall outside of antitrust law³ because these are not agreements between undertakings. In the EC's view, as long as the non-competes are compliant with national labour laws, they are less restrictive ways of protecting the employers' investments in training or non-patent IP. This is because unlike no poach agreements, the non-competes are transparent vis-a-vis employees, who can then ask for an equitable compensation.

The EC gives a bit more guidance on the analysis of no-poach deals under the ancillary restraint doctrine. There are four cumulative conditions that need to be met: (i) there is a main non-restrictive transaction, e.g., a research joint venture or a supply agreement; (ii) the restraint is directly related to the transaction; (iii) the restraint is objectively necessary for the main transaction's implementation, (iv) the restraint is proportionate to the main transaction, meaning there should be no less restrictive means to allow that transaction to take place. With regard to the last limb of the test, the EC notes that the parties need to show:

• there are no restrictive means of ensuring the existence of the same relationship, including other equally effective means of protecting non-patent IP rights or the investment in employee training, such as non-disclosure agreements, possible obligations on the employees to reimburse proportionate training costs, national labour-law-compliant noncompete clauses, gardening leaves, etc., and
• that the scope and duration of the clause is proportionate, e.g., it does not cover all employees but is strictly limited to only a necessary number of employees, is limited in time and geographical scope, etc.

Practical takeaways and outlook

The EC is ready to scrutinise wage-fixing and no-poach arrangements in both horizontal and vertical agreements concluded between businesses. Labour-related arrangements are analysed in the context of their impact of the relevant labour market, regardless of whether parties also compete in the product market.

• The EC's default position seems to be that wage fixing and no-poach agreements (i) have, by their very nature, the potential to restrict competition, and (ii) are unlikely to meet requirements to qualify as ancillary restraints or be exempted under Article 101 (3) TFEU.
• Whilst there seems to be more leeway with regard to justifying no-poach deals, the availability of exemptions for those arrangements will probably depend on facts of an individual case and any notional benefits submitted by parties will be carefully scrutinised by the EC. This is because the EC seems to be convinced that there are other as effective but less restrictive means of achieving the same goals that no-poach deals aim for. It is therefore necessary that companies draft such clauses carefully and narrowly.
• The brief suggests that the EC's attention on antitrust issues in labour market is predominantly linked to the anti-competitive effects that labour market arrangements might have on competition rather than the welfare of workers themselves. However, the broader focus (such as is currently in the US⁴) cannot be excluded either as the EC in the brief acknowledges several times that the labour market restrictions have negative impact on employees themselves.
• The EC's position on non-compete clauses in employees contracts is in stark contrast to the position in the US. Recently, the Federal Trade Commission voted 3-2 to finalize and promulgate a rule banning most non-compete clauses in employer-employee contracts. For more details, please read here.
• Most cases of wage-fixing and no-poach agreements are likely to be dealt with by EU National Competition Authorities due to the geographic scope which has often local effects, but the EC can bring its own cases and has a coordinating role within the European Competition Network.
• The head of the EC's cartel unit has recently confirmed that labour market related offences are a key focus of the EC. We understand that the EC is currently pursuing a few of such cases.
• The brief does not address labour-related issues in the context of merger control. A senior EC official has recently stated that the EC considers that non-competes and large-scale hires impact the dynamic of competition for innovation. In our view, if the concern is innovation, this would seem to speak in favour of focusing on such arrangements between downstream competitors (contrary to the approach advocated in the brief). The EC is currently scrutinising a company's large-scale hire arrangements to see whether this could amount to companies' integration and is a way to side-step merger control rules. Other antitrust authorities are ready to use labour-related theories of harm in merger control assessments. In that regard, the US Federal Trade Commission's lawsuit against Tapestry/Capri merger is notable as the agency claims that the merger would create an employer with anticompetitive buyer power and harm workers in the luxury style industry.
• The message for companies doing business in the EU and internationally is clear: it is vital to ensure that legal and HR departments are fully familiar with competition law compliance in this sphere. To assist you in keeping up with global developments in the antitrust and labour space, we have launched a White & Case heatmap of antitrust and labour developments (WHALD). The WHALD aims to help you spot key developments – and navigate your way through the current global patchwork of approaches, caselaw and policy statements. You can access the WHALD here.

_{1 Including non-solicit and no-hire agreements.
2 If wages were qualified as "future prices", i.e., as future purchasing prices in the purchasing market for labour force. See Revised Horizontal Guidelines, paragraph 279 (a). 
3 Specifically Article 101 TFEU.
4 For more details, also see Tilman Kuhn, Strati Sakellariou-Witt, Kathryn Mims and Jaclyn Phillips, Emerging Insights on Antitrust Issues in Labor Markets: Growing international enforcer concern for worker welfare, Concurrences.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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