In early June, the poaching of employees between competing companies was raised in the public space, with a public debate on whether such practices are fair or unfair competition. As a preventive measure, the Competition Council (the CC) explains which factual circumstances situations may arise where competing companies impose restrictions on their employees in a coordinated manner which may create a risk of infringements of prohibited agreements under Latvian and EU competition law.
Pursuant to Section 11 of the Competition Law (CL) which is derived from Section 101 of the Treaty on the Functioning of the European Union, agreements between market participants which have as their object or effect the hindrance, restriction, or distortion of competition in the territory of Latvia are prohibited and null and void from the moment of being entered into. Section 11 of the CL lists examples of prohibited agreements, including agreements regarding the direct or indirect fixing of prices (including wages) and tariffs in any manner, or provisions for their formation, as well as regarding such exchange of information as it relates to prices or conditions of sale and the allocation of markets (including labour market allocation), taking into account territory, customers, suppliers, or other conditions. Within the meaning of the CL, an agreement is a contract between two or more market participants or concerted practices in which market participants participate, as well as a decision made by a registered or unregistered association of market participants or by an official of such association. Agreements may be both written (embodied in contracts and other communication forms) and unwritten (including verbal, as well as informal common understanding of an agreement, coordinated actions).
Agreements concluded between independent market players that are competitors with each other on the terms and conditions of recruitment of their employees are also referred to as no-poach agreements. Specifically, these agreements stipulate that these market players do not recruit each other’s employees or agree on the level of wages offered to employees. Such agreements restrict workers’ mobility and prevent them from receiving fair pay in a competitive market, which can also harm workers’ career goals and development. No-poach agreements restrict competition by preventing the employee from receiving competing offers from potential employers and companies from competing with each other for an essential resource for their growth. Such offers can be used by the employee in normal market conditions to negotiate better wages, both from current and future employers. The practice of the member states of the European Union shows that such collusion is regarded as a restriction already aimed at restricting competition, which is the most serious infringement of competition law.
No-poach agreements should not be confused with non-compete clauses in contracts, which are used by employers to protect investment and business by restricting an employee’s ability to move to a competitor within a mutually agreed period of time. Such agreements are generally permitted and regulated, with particular attention to ensuring that they do not disproportionately restrict personal freedom. However, the difference is that non-compete clauses are usually contained in contracts between employer and employee, whereas no-poach agreements are usually hidden and exist between competing companies regarding their employees – a practice that is prohibited. At the same time, if the employer has invested company resources in the employee, it is possible to stipulate in the employment contract the conditions regarding their compensation or the time limit for working for a particular employer. As the experience of competition authorities in other countries shows, no-poach clauses are generally not disclosed and are not known to employees, thus also preventing them from disputing such clauses, which are accepted in practice between competitors, for example, under labour law legislation. However, such situations can be avoided by competition law.
It is observed that no-poach agreements exist particularly in closed sectors where the employees are specialists in a particular field or are endowed with special talents and there are only a few such employees in a certain market, for example, in the technology sector, the healthcare sector, and other professional services sectors. No-poach agreements are often concluded within industry associations, where competitors at the industry-wide level mutually agree not to hire each other’s employees and to fix the wage levels of employees. Often, no-poach agreements are taken as ‘gentlemen’s agreements,’ i.e., very informal agreements between industry players not to hire each other’s employees – especially in smaller markets with a small circle of competitors who are known to each other.
The CC reminds that for independent market players who are competitors with each other, similar to the prohibition on price fixing, market sharing, participation in procurement, are prohibited to:
- mutually agree to restrict employees in the context of the recruitment by a competitor;
- mutually agree in any way on the level of wages of employees.
If you recognise a possible no-poach agreement in your practice as an employee or employer, please report it to the CC.