Employee Wage-Fixing & No-Poaching Prohibitions: 8 Practical Implications
Published:
June 23, 2023
Author(s):
Effective June 23, 2023, Section 45(1.1) of the Competition Act makes it a criminal offence for all unaffiliated employers to enter into wage-fixing or mutual no-poaching agreements with respect to employees. Section 45(1.1) has significant implications for all employers in the contexts both of their daily operations and specific business arrangements, like mergers and acquisitions, franchises, employee secondments and consultants. On May 30, 2023 the Competition Bureau released its final Enforcement Guidelines regarding new Section 45(1.1). The Enforcement Guidelines clarify the Bureau’s interpretation of and anticipated approach to enforcing this new criminal conspiracy provision. Here are eight practical implications of the Competition Act’s wage-fixing and mutual no-poaching agreement prohibitions.
1. Prohibitions Apply to All Employers
Some existing provisions of the Act apply only to actual competitors. In contrast, the Act’s new wage-fixing and no-poaching agreement prohibitions apply to all unaffiliated employers – regardless of whether they’re competitors or the agreement between them impacts competition. If you have employees, the Act’s wage-fixing and no-poaching agreement prohibitions apply to you. However, the new provisions don’t apply to affiliated companies, such as companies controlled by the same parent company.
2. “Employer” is Broadly Defined
The Act’s definition of “employer” includes directors, officers, agents and employees (which in turn includes human resources personnel). This means the prohibition against wage-fixing and no-poaching agreements – and their non-compliance penalties – will apply to you even if employees such as human resources managers at unaffiliated companies enter into agreements without the Board’s knowledge, approval or consent. Ensure your Board, senior management and officers are educated on these Competition Act prohibitions so they don’t inadvertently breach them, exposing both you – and them personally – to the Act’s non-compliance penalties.
3. Wage-Fixing Agreements Are Prohibited
“Wage-Fixing Agreements” include any agreement between two or more “employers” to control or fix salaries, wages or “terms of employment”. The Act defines “terms of employment” broadly to include all responsibilities, benefits and policies associated with a job (for example, job descriptions, per diem and mileage reimbursements, non-monetary compensation, working hours, location and non-compete clauses) as well as any other directives that could restrict an individual’s job opportunities. Start treating salaries, wages and most other terms of employment as confidential and competitively sensitive information vis-à-vis your competition. But remember to comply with any applicable pay transparency legislation vis-à-vis your employees.
4. Mutual No-Poaching Agreements Are Also Prohibited
“No-Poaching Agreements” include any agreement between two or more employers that limit opportunities for employees to be hired by the parties to the agreement. Examples of such limitations include restricting the communication of information related to job openings or adopting hiring mechanisms designed to prevent employees from being poached or hired by another party to the agreement. However, the Act still permits one-sided no-poaching agreements; an example is a unilateral policy or agreement by one employer not to poach another’s employees.
5. Pre-Existing Agreements Aren’t Prohibited
The Act’s wage-fixing and mutual no-poaching agreement prohibitions apply to all new agreements between employers, including informal arrangements for monitoring or sharing employment information, entered into on or after June 23, 2023. But they don’t apply to agreements employers entered into before June 23, 2023 – unless and until at least two parties to the agreement renew or reaffirm it. This two-party renewal requirement is helpful to employers because it avoids mutual liability where one party has taken steps to reaffirm an agreement but the other hasn’t. Accordingly:
- Before any existing agreements are renewed or re-affirmed, carefully review them to ensure they don’t include wage-fixing or no-poaching agreements.
- Avoid enforcing any wage-fixing or mutual no-poaching agreements that you entered into before June 23, 2023 unless you’re absolutely sure that the enforcement doesn’t constitute a renewal or re-affirmation of that agreement.
- Update pre-existing agreements as they arise in the ordinary course of business to ensure they accurately reflect all parties’ intentions and policies with respect to wage-fixing and no-poaching restrictions.
6. Conscious Parallelism & (Limited) Information Sharing Are Permitted
The prohibitions against wage-fixing and mutual no-poaching agreements don’t apply to “conscious parallelism,” that is, when an employer makes decisions based on independent monitoring of the market and its competitors. Employers are entitled to monitor the marketplace and anticipate their competitor’s responses. Likewise, information sharing is permissible to a point. Employers can share information amongst themselves in the course of collaborative activities; however, exercise caution and avoid sharing commercially sensitive information such as employment terms to ensure you don’t accidentally find yourself offside the new prohibitions.
7. The Ancillary Restraints Defence (ARD) is Risky
The Act offers non-compliant employers limited defences. The most readily available is the ancillary restraints defence (ARD), which protects an otherwise impermissible agreement when it’s directly related to and reasonably necessary for achieving the objective of a broader or separate agreement between the same parties. The Competition Bureau’s Enforcement Guidelines sets out a list of factors it will consider in determining whether an agreement is necessary for achieving a broader agreement between the parties, including:
- Whether other, less restrictive means for accomplishing the parties’ intentions were available at the time of the agreement.
- The duration and geographic scope of the restraint
- Whether the absence of restraint would have resulted in uncertainty or higher costs between the parties.
- The circumstances and negotiations that led to the adoption of the agreement.
Despite this guidance, the application of the ancillary restraints defence remains uncertain and it’s still risky to count on it without further clarification from the courts. That said, the Guidelines do offer some guidance about the specific application of the amendments and the ancillary restraints defence to common agreements between employers, including:
Mergers & Acquisitions. The original draft Enforcement Guidelines indicated that the ancillary restraints defence will generally protect businesses that include employee restrictions in merger and acquisition and joint venture agreements. While the Competition Bureau removed the merger and acquisition example from the final Enforcement Guidelines, given the nature of those agreements, it’s likely the Competition Bureau’s initial guidance still applies.
Franchisors & Franchisees. The effect of section 45(1.1) and the availability of the ancillary restraints defence on no-poach restraints in the franchising context depends on the nature of the restraint:
- Both franchisors and franchisees are employers and aren’t typically corporate affiliates. Therefore, reciprocal no-poaching clauses between franchisors and franchisees in standard form Franchise Agreements will run afoul of Section 45(1.1). However, they can be saved by the ancillary restraints defence if the restraints aren’t broader than necessary. But because one-sided no-poaching agreements are permissible under section 45(1.1.), franchisors are better advised to adopt one-sided no-poaching clauses in their favour than to adopt reciprocal no-poaching clauses and rely on the ancillary restraints defence. Of particular importance to franchisors, the final Enforcement Guidelines clarify that standard clauses in Franchise Agreements in which each franchisee separately agrees only with the franchisor not to poach employees from other franchisees won’t normally raise concerns for the Competition Bureau under s. 45(1.1.) – as long as the scope of such no-poach clauses are no broader than necessary and there’s no evidence of any no-poach agreements directly between franchisees.
- No poaching agreements directly between franchisees will run afoul of section 45(1.1). The ancillary restraints defence won’t normally save them because the defence applies only where there’s a broader agreement between the parties. Franchisees don’t enter into Franchise Agreements with one another and simply being part of a broader franchise system by virtue of each franchisee’s separate Franchise Agreement with the franchisor doesn’t meet the broader agreement requirement. That said, the Enforcement Guidelines contemplate that where one franchisee poaches an employee from another after that franchisee already invested in training the poached employee, an arrangement between franchisees to recoup training costs from one another is allowable. This is provided the compensation payable under such arrangement is reasonably related to the costs incurred for training and the cost doesn’t serve to disadvantage trained employees, relative to external candidates, when they seek employment with other franchisees.
Employee Secondments & Consulting Agreements. The Act still permits one-way no-poaching agreements prohibiting an employer from poaching a seconded employee. Accordingly, secondment or consulting agreements prohibiting a company from poaching a seconded employee or embedded consultant are permissible provided the agreement is truly unilateral. Where the agreement is mutual, it’s much less clear. While the ancillary restraints defence could apply to mutual no-poaching agreements in a broader secondment agreement, whether it does depends on the application of the factors outlined above that the Bureau considers when determining whether a no-poaching agreement is necessary for achieving a broader agreement between the parties, and will need to be determined by the courts on a case-by-case basis.
Collective Bargaining. Pursuant to section 4 of the Competition Act, the Act doesn’t apply to collective bargaining activities including contracts, agreements or arrangements between or among two or more employers in a trade, industry or profession pertaining to collective bargaining with their employees. Therefore, collective agreements, project labour agreements and agreements imposed as a result of membership in an employers’ organization are automatically exempted under the Act and don’t need to rely on the ancillary restraints defence.
8. The Penalties for Breaching the Prohibitions Are Stiff
Any company or individual – including a director, officer or agent personally – found guilty of breaching the new provisions of the Act faces imprisonment for up to 14 years, a fine at the court’s discretion, or both.
Please contact your McInnes Cooper lawyer or any member of our Labour & Employment Law Team @ McInnes Cooper to discuss how to ensure you comply with the Competition Act’s wage-fixing and no-poaching prohibitions.
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