Employers beware: Canada’s wage-fixing and no-poach offence now in effect

August 2023  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2023 Issue

On 23 June 2023, a new criminal offence in Canada’s Competition Act came into force that criminalises agreements between unaffiliated employers to fix salaries, wages or other terms and conditions of employment or agree to refrain from soliciting or hiring each other’s employees.

While this offence was introduced as part of several amendments to the Canadian competition regime in the federal government’s 2022 Budget Implementation Act, the impetus for delaying its enforceability was to give the Competition Bureau, Canada’s competition law enforcement agency, time to formulate the ‘Enforcement Guidelines on wage-fixing and no poaching agreements’, and to allow employers to bring their existing practices into compliance with the new law.

Agreements that fall into these categories had previously attracted potential civil enforcement under the Competition Act; their criminalisation marks a significant shift in the enforcement landscape, particularly as regards the sanctions available for infringements, which can now include prison sentences for implicated individuals and very significant financial penalties.

The genesis for criminalising certain buy-side agreements lies in the early stages of the coronavirus (COVID-19) pandemic when several Canadian grocery chains were subject to scrutiny for their allegedly coordinated decision to cease making ‘hero bonus’ payments to their employees. While claims of deliberate coordination were not substantiated, the flurry of attention reinvigorated calls for buy-side agreements, particularly as they relate to wage-fixing and no-poach commitments, to be treated as per se infringements. This means that while the Bureau would still need to establish a ‘meeting of the minds’ (i.e., an agreement to engage in the impugned conduct), it would not need to establish anti-competitive effects to obtain a criminal conviction.

In developing this offence, the Canadian government has looked to the US, where wage-fixing and no-poach agreements also receive per se treatment as a matter of policy from the US Department of Justice (DOJ). However, this is a matter of enforcement posture rather than legislative codification. It remains at the discretion of US courts to interpret these issues on a case by case basis, making the US framework less rigid than its Canadian counterpart, for example by taking into account a long history of US jurisprudence supporting certain buy-side agreements having pro-competitive impacts.

In the guidelines, the Bureau has acknowledged that (as is the case in the US) it will only assess naked restraints under the criminal provision, which excludes wage-fixing or no-poach commitments that are ancillary to merger transactions, joint ventures, strategic alliances, certain business arrangements (such as franchise agreements) and certain service provider-client relationships (such as staffing or IT service contracts).

However, the Bureau has reserved the right to commence a criminal investigation where these clauses are broader than necessary or where the business arrangement is a sham, creating ambiguity as to where the line between a naked and ancillary restraint truly lies.

With the DOJ struggling in recent years to prosecute buy-side agreements to a criminal standard of proof, these dynamics suggest that the Bureau may face an even steeper hill trying to prosecute these agreements in Canada.

Overarching considerations

Before diving into each of the wage-fixing and no-poach elements, there are a few overarching themes to note. The wage-fixing and no-poach offence applies to agreements between ‘unaffiliated employers’, meaning that agreements between a parent and its subsidiary, or between entities controlled by the same parent, will not violate these provisions. More importantly, the new provision applies to agreements between ‘employers’ and not ‘competitors’, which broadens the scope of agreements that can fall offside. Directors, officers and other employees such as HR professionals are also caught within the scope of an employer, opening these individuals up to prosecution alongside the corporate entity.

Given the offence applies only to agreements ‘between employers’, it is necessary to consider whether, in respect of the conduct under investigation, an employment relationship exists, which depends on fact-specific considerations. For example, in assessing a hypothetical scenario where a staffing agency temporarily places specialised workers at a company pursuant to a services agreement that includes a mutual non-solicitation commitment for the duration of the agreement, the guidelines note that it will “examine the relationship between the workers and employers to determine whether an employer-employee relationship exists” taking into consideration applicable provincial and federal legislation, and concludes that “if an employer treats an independent contractor as an employee, the business contract between them could transform into an employment relationship”.

Although the wage-fixing and no-poach offence applies to agreements made on or after 23 June 2023, the Bureau has indicated that it will also pursue enforcement action where employers engage in conduct that reaffirms or implements an agreement that was made prior to this date. According to the Bureau, while renewal (automatic or otherwise) of an agreement that includes an offending clause will not, by itself, constitute sufficient conduct to warrant enforcement action, employers should nonetheless use upcoming renewals as an opportunity to update agreements to accurately reflect the parties’ intentions.

Wage-fixing agreements

The prohibition on wage-fixing agreements includes any agreement or arrangement between unaffiliated employers to fix, maintain, decrease or control wages, salaries or other terms and conditions of employment. The scope is intentionally broad and captures terms and conditions associated with an employee’s responsibilities, benefits (including non-monetary compensation) and job-related policies. The Bureau has indicated that any term or condition of employment that has the potential to cause an employee to take a job or remain in a job, is included in the definition. For example, where the HR representatives of two medical laboratories decide during a lunch meeting to limit each of their employees’ annual bonus to 5 percent, this would likely constitute a prohibited agreement between employers to fix a term or condition of employment, regardless of whether they compete in the supply of laboratory-related services.

Employers may also find themselves unwittingly offside the wage-fixing prohibition when it comes to benchmarking for salaries or other compensation. While the sharing of information related to wages or employment terms is not itself necessarily illegal, as in existing supply-side cartel enforcement regarding matters such as price fixing, the sharing of competitively sensitive information can give rise to an inference that an illegal agreement exists between parties.

Therefore, employers should exercise caution when sharing commercially sensitive information, including on any employment terms, in the course of collaborative activities. To avoid the impression of coordination, employers should use a neutral third party that is subject to confidentiality obligations to manage the exchange of information. While arguably less effective for benchmarking purposes, relying on historical data rather than current salaries can also help to avoid the inference of coordination.

Finally, employers should use a dataset that includes information from multiple employers (with a minimum number of participants in each survey) and ensure that data is anonymised and aggregated, so that specific data points cannot be backtracked to identify the associated employer.

No-poach agreements

In addition to prohibiting naked agreements between unaffiliated employers not to solicit or hire each other’s employees, the prohibition on no-poach agreements applies to other limitations designed to prevent an employee’s job opportunities. This includes agreements to restrict the communication of information related to job openings or the joint adoption of biased hiring mechanisms.

As a preliminary matter, no-poach agreements must be mutual to constitute a criminal offence, which provides comfort for companies that make one-sided non-solicitation or no-hire commitments when engaging outside consultants or staffing agencies in the ordinary course of business.

Two-way non-solicitation arrangements need to be considered more carefully. In assessing a hypothetical scenario where a consulting firm embeds its employees in a client’s business for a set period of time pursuant to an agreement where the client agrees not to hire the embedded employees, the guidelines provide that the agreement “lacks a reciprocating promise” on the part of the consulting firm and therefore, the restraint does not apply to each other’s employees. However, where reciprocal no-poach commitments are made in separate agreements between parties, these can be viewed together as an agreement that violates the prohibition on no-poach agreements.

In other words, companies cannot avoid the purpose of the legislation by documenting reciprocity in two different agreements. It is also conceivable that companies could mistakenly agree to reciprocity with a counterparty, where another agreement that includes a second one-way no-poach provision already exists. Undertaking diligence of these issues prior to entering no-poach agreements is therefore essential.

This dynamic can be particularly risky in the context of franchise agreements. No-poach commitments that are ancillary to a franchising arrangement may avoid scrutiny, but the line between a naked and ancillary restraint remains ambiguous. The guidelines provide a hypothetical situation where a franchisor and each of its franchisees agree not to poach each other’s employees, as well as employees of other franchisees.

Although the franchisees do not enter into agreements directly with one another, they agree to the no-poach commitment with the franchisor on the understanding that the same commitment applies to every other franchisee.

Recognising the time and financial commitment that goes into training new employees, the guidelines acknowledge that such a restraint can play an important yet ancillary role in the franchise model but note that the Bureau may still initiate an investigation where the no-poach commitment is broader than necessary.

While the Bureau provides no guidance on what makes a no-poach commitment “broader than necessary”, companies in a franchise or other business relationship can limit both the scope of employees subject to the no-poach commitment and the duration of the no-poach commitment (i.e., ensuring that the no-poach commitment lasts no longer than the broader commercial agreement) to make it more palatable.

With respect to the understanding between franchisees, the guidelines acknowledge that mere awareness of a parallel standard agreement will not, by itself, raise concerns; however, franchisees could draw scrutiny where they take steps to enforce the no-poach commitments contained in the franchise agreement. Instead, the guidelines suggest that the Bureau may look more favourably on alternate arrangements to a no-poach commitment.

For example, where franchisees establish a system among themselves to recoup training costs from another franchisee who poaches an employee (rather than relying on the franchisor to enforce the no-poach commitment), such an arrangement would not be problematic so long as the compensation is reasonably related to the training costs and the programme does not disadvantage poached employees relative to external candidates.

The road ahead

These are complex issues, which will ultimately turn on the applicable commercial facts, and the Bureau’s posture on some of these matters is likely to evolve as it commences enforcement activities in this area.

While the guidelines provide a helpful starting point, their broad nature leaves much to be desired in understanding how the Bureau will go about enforcing this new offence. Regardless, employers can take steps now by consulting with in-house counsel or external counsel to review their business practices, conduct and agreements to ensure that the increased risk associated with the criminalisation of these agreements is appropriately mitigated.

 

Michael Caldecott is a partner and Alykhan Rahim is an associate at McCarthy Tétrault LLP. Mr Caldecott can be contacted on +1 (416) 601 7738 or by email: mcaldecott@mccarthy.ca. Mr Rahim can be contacted on +1 (416) 601 8203 or by email: arahim@mccarthy.ca.

© Financier Worldwide

BY

Michael Caldecott and Alykhan Rahim

McCarthy Tétrault LLP

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