European Commission focuses on competition in labor markets, focusing on wage setting and anti-poaching agreements | Skadden, Arps, Slate, Meagher & Flom LLP

Key points

Since a new statement from the European Commission (EC) says wage-setting and anti-poaching agreements are inherently anti-competitive (restrictions on competition ‘by object’) and contain few possible defenses, companies should consider:

• Ensuring their compliance tools reflect the risks associated with wage setting and no-poaching agreements.
• Refraining from agreements or exchanges of information regarding wages, salaries or benefits.
• Relying on alternative protections to retain talent, prevent disclosure of non-patent intellectual property rights, and protect investments in employee training (e.g.confidentiality agreements, gardening leave or other post-employment restrictions).
• By carefully tailoring contracts to ensure talent is retained in the event of a “takeover” (i.etransactions whose main purpose is to acquire the victim’s talent).

To date, the European Commission’s Directorate-General for Competition has not taken enforcement action including a stand-alone agreement on wage setting or a ban on poaching. This may change following the May 3, 2024 policy guidelines, which herald a new focus on wage setting and anti-poaching agreements.

• The document states that wage-setting and non-poaching agreements between competitors are so harmful that the agreements will be automatically treated as illegal (“by purpose” restrictions) without the EC having to demonstrate anti-competitive effects.
• Such arrangements generally do not qualify for relief because they provide business efficiencies or constitute reasonable collateral restrictions.
• The European Commission is conducting several open cartel investigations into anti-poaching agreements.

Automatic illegality “by object”.

Despite the lack of EC decision-making practice on wage-fixing and anti-poaching agreements, the document classifies such agreements as so harmful that they should be considered restrictions ‘by object’ and therefore automatically illegal without proof of their impact on competition.

The article compares such agreements to buyer cartels, which fall within the scope of Art. 101 of the Treaty on the Functioning of the European Union (TFEU). Wage fixing is considered a form of purchase price fixing and no-poaching agreements are considered a form of supply market sharing, each of which is accordingly treated as an infringement ‘by object’ in previous EC decisions and EU court jurisprudence.¹

The document goes on to state that there will generally be no defense to labor market agreements. The EC will not accept arguments that the agreement is necessary because it protects the company’s incentive to invest in the training of its employees or because it protects non-patent intellectual property that employees could take with them if they moved to a competing company. This rejection is based on the fact that less restrictive measures – such as confidentiality agreements, an obligation to remain with the employer for a minimum period of time, reimbursement of proportionate training costs, gardening leave or lawful non-compete clauses between employer and employee – can achieve these same goals.

In contrast, traditional non-competition agreements between an employer and an employee generally fall outside the scope of EU competition law after their expiry date. Current legislation requires a contract between at least two companies and the employee is not considered an “undertaking” for the purposes of EU competition law. However, since contracts between self-employed persons are technically contracts between undertakings,² EU competition law on wage-fixing and anti-poaching agreements applies to such agreements.

The fact that the companies are not competitors in any downstream market is irrelevant. The document states that the relevant market is the talent market, regardless of whether companies also compete in any product markets. Therefore, companies in various industries (gambling and insurance, for example) may agree not to steal from other statisticians.

High bar for additional security

Restrictions agreed in the context of other legal transactions – for example, outsourcing arrangements or research and development contracts – may be considered lawful additional to the main transaction because companies may not want to risk cooperation if their employees could be robbed by the partner. EU competition law recognizes the doctrine of ancillary restrictions if:

• The main transaction is not restrictive.
• The disclaimer is directly related to this transaction.
• The restriction is necessary to complete the transaction.
• There are no less restrictive ways to enable a transaction to take place.

While the EC’s approach to wage-fixing and anti-poaching agreements remains to be tested, standard non-solicitation provisions in the context of M&A transactions may be justified, for example, under the ancillary restraints doctrine if the above criteria are met.

National competition authorities have considered labor market agreements to be ancillary restrictions. For example, in 2018, the Croatian Competition Authority found that an anti-poaching agreement between two traders regarding the provision of IT services qualified as an ancillary restriction because the agreement was directly related to the implementation of the main contract and the anti-poaching agreement was objectively necessary for the main contract. However, the new EC brief signals that such arguments will rarely be accepted.

Defense Effectiveness Unlikely

Additionally, a business justification exemption will generally not be available. Under EU competition law, agreements that restrict competition, even if they infringe the rules ‘by object’, can be exempted on the grounds of business efficiency. The parties must demonstrate that (i) the agreement contributes to business efficiency; (ii) consumers will receive a fair share of the benefits; (iii) restrictions are necessary; and (iv) the agreement does not significantly eliminate competition.

The brief disputes that wage-setting agreements can generate pro-competitive effects. Similarly, although anti-poaching agreements may protect companies’ incentives to invest in employee training without fear that competitors will later hire those workers, the net efficiency remains uncertain. A non-poaching agreement will generally not meet the necessity requirement, given that there are less restrictive measures such as non-disclosure agreements, an obligation to remain with the employer for a minimum period of time, reimbursement of proportionate training costs, gardening leave and non-compete clauses.

Increasing law enforcement around the world

In recent years, labor market agreements have become a priority for competition authorities around the world. At EU Member State level, regulators have issued guidance (e.g., the January 2024 “Joint Nordic Report on Competition and Labor Markets” of the Danish, Norwegian, Swedish, Finnish and Icelandic competition authorities) and initiated numerous investigations. For example, in May 2024, the Portuguese competition authority opened an investigation against a global technology consultancy firm that allegedly agreed not to employ employees of competitors. In addition, the Slovak Competition Authority opened an investigation into a potential labor cartel agreement to examine whether the national industry association restricted competition in the hiring of workers through a provision of its code of ethics.

The authorities also did not hesitate to impose fines (e.g, on real estate agencies in Lithuania (EUR 969,060 fine), football league clubs in Portugal (EUR 11.3 million fine) and technology consulting companies in Portugal (EUR 1,323,000 and EUR 2,481,000).

In the UK, in January 2024, the Competition and Markets Authority (CMA) published its research report ‘Competition and market power in UK labor markets’. The CMA is currently conducting at least three investigations into alleged restrictive labor market agreements.

In the US, antitrust regulators at the Department of Justice and the Federal Trade Commission (FTC) have focused on competition in labor markets since the Obama administration, both in the context of mergers and where non-compete agreements restrict workers’ freedom to change work. (See our March 2024 article “Antitrust Enforcers Are Increasingly Focusing on Labor Markets, and Not Just in the Context of Mergers”).

However, the EU’s position outlined in the new document appears to be milder than the current Biden administration’s policy in the US, where the FTC recently adopted a rule broadly prohibiting new non-compete agreements and making existing non-compete agreements unenforceable except for certain “senior” executives. ” (The FTC rule is scheduled to go into effect on September 4, 2024, provided the rule is not ordered or otherwise delayed due to legal challenges.)³ In contrast, the EC’s position suggests that non-compete clauses are a potentially valid alternative to non-poaching and wage-fixing agreements, as long as these clauses are compatible with national law. However, in addition to the express agreements required by the United States, the EU system covers concerted practices and is therefore more stringent than the United States in relation to implied agreements.

Caroline Janssens, Head of Competition Strategy/Antitrust Expertise, contributed to this article.

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1 See decisions and case law cited in footnotes 33 and 34 of the letter.

2 See Guidelines on the application of EU competition law to collective agreements on working conditions of self-employed workers, OJ C 374 of 30/09/2022, point 6.

3 See our May 8, 2024 alert, “FTC Non-Compete Order Now Scheduled to Take Effect on September 4.”

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