"War for talents" in the crosshairs of competition authorities

25.10.2018

Companies, especially high-tech firms, compete fiercely for talented employees. Demographic change and the increased shortage of skilled employees will further exacerbate the competitive pressure. Against this background, human resource managers of different firms may be inclined to discuss among themselves to not poach each other’s employees (potential no-poaching agreements). Or employers might feel inclined to discuss the employment conditions of potential employees such as salaries (potential wage-fixing agreements). Such agreements are not generally exempted from competition law. In the US these types of agreements have been prosecuted and fined for decades. In Europe, this issue has not been an enforcement focus yet. However, this might change. Therefore, companies and especially human resource managers need to take all necessary measures to ensure compliance with competition rules in this area.

A. The US example

The US Department of Justice (DOJ) has almost three decades of experience with regard to illegal agreements and information exchange in the human resource area. The cases range from high profile no poaching cases such as the investigation against Adobe, Apple, Google, Intel, Intuit and Pixar that ended in September 2015 with a settlement of 415 million USD to cases concerning small firms. In August 2018, for example, two Texas therapist staffing companies settled a wage-fixing case concerning contract therapist with the US Federal Trade Commission (FTC).

This was the first enforcement action of the FTC under the Antitrust Guidance for human resource professionals, which was published in October 2016 jointly with the Department of Justice (DOJ) (“the Guidance”) with the aim to raise awareness and highlight the relevance of competition law in the human resource area.

According to the Guidance, competition among employers helps actual and potential employees through higher wages, better benefits as well as other terms of employment. No-poaching agreements and wage-fixing agreements qualify as hard core restrictions of competition as long as they are “naked”, i.e. they are not agreed as ancillary restraints to legitimate collaboration between the companies. It is irrelevant whether the companies are competitors on the market for the same products or services. Decisive is only the fact that the companies compete for the same employees. The DOJ only brought civil enforcement actions against infringers in the past, thus it is noteworthy that the Guidance states that in the future the DOJ could also bring criminal prosecution against individuals, the company, or both.

Besides wage-fixing agreements, the Guidance mentions that also information exchange with competitors about terms and conditions of employment may violate the competition rules. However, an information exchange may be lawful if a neutral third party manages the exchange and the information is relatively old as well as aggregated. Also, exchange of information in the course of due diligence prior to a transaction may be lawful as long as appropriate precautions are taken.

Since many companies are operating internationally, human resource professionals also from Germany and the EU in general need to be familiar with the DOJ Guidance in order to avoid liability due to competition law infringements as a result of illegal agreements and information exchange in the human resource area. The relevance of the DOJ Guidance for European companies can be shown in the very recent case of the German rail equipment supplier Knorr-Bremse, also active in the US, which in April 2018 reached a settlement with the DOJ due to no-poaching agreements with its competitor Westinghouse Air Brake Technologies Corporation.

B. Status in EU and Germany

In the past on European level, no-poaching agreements were either reviewed as ancillary restraints to transactions or were occasionally examined in cartel proceedings along with other competition law infringements. In any case, there has been no decision by the European Commission dealing exclusively with no-poaching agreements. Irrespective of this, no-poaching and wage-fixing agreements are caught by the general cartel prohibition as they distort or - in the case of no poaching agreements - even prevent competition between employers altogether. Wage-fixing agreements must be seen as highly critical since they might very well be qualified by the European Commission and the European Courts as price fixing. Price fixing constitutes a hard core restriction of EU completion laws. No-poaching agreements, by contrast, might be justifiable when - as ancillary clauses to R&D agreements or mergers - promoting technical or economic progress. Yet the scope of such a potential exemption remains hazy.

Similarly, most national competition authorities have not explicitly dealt with this topic either. In Germany, there is no decision practice or case law addressing the lawfulness of „naked“ no-poaching agreements in the context of competition law, neither by the German Federal Cartel Office (FCO) nor by the German Bundesgerichtshof. However, in 2014 the Bundesgerichtshof ruled an ancillary no-poaching agreement limited to 2 years as not violating the employees‘ freedom to choose an occupation. Apart from this rather general ruling, in one of its merger control guidelines, the FCO clarifies that ancillary no-poaching agreements concerning a target‘s key employees may be lawful, in particular if skills and knowledge of these employees are crucial for the target‘s economic success.

C. Outlook and Recommendations

Although there have been no proceedings on the EU level or in Germany concerning exclusively the human resource area yet, it is expected that the developments in the US will be closely observed by the antitrust watchdogs in Europe.

Against this background, employers are well advised to scrutinize agreements with competitors closely that concern the fixing of wages or poaching. The lawfulness of no-poaching agreements will depend on an overall case-by-case assessment.

Any questions? Please contact: Alexander Israel, Dr Fabian Hübener, Maximilian Kiemle
Practice Group: Antitrust & Competition