Employers beware: upcoming prohibitions on ‘naked restraints’ on competition

At the end of June, it will be a criminal offence for employers to agree with one another to: (a) fix, maintain, decrease, or control wages or other terms of employment; and (b) enter agreements to not solicit or hire each other’s employees. Photo credit: Pexels/Mart Production

 

On June 23, 2022 significant amendments were made to Canada’s Competition Act (the “Act”) that concerned employment practices in Canada. The majority of the amendments came into force immediately, however, some of them relating to wage-fixing and no-poaching agreements are about to come into force on June 23, 2023.

When they come into force these new amendments will form part of the criminal conspiracy provisions of the Act. The criminal conspiracy provisions are reserved for agreements between competitors to fix prices, allocate markets, or restrict output.  Such conduct is known as “naked restraints” on competition. 

What that means for employers? While the Act does not define the term “employer”, the Bureau has previously defined “employer” very broadly to include “directors, officers, as well as agents or employees, such as human resource professionals.” 

Under the new amendments it will be a criminal offence for employers to agree with one another to: (a) fix, maintain, decrease, or control wages or other terms of employment; and (b) enter agreements to not solicit or hire each other’s employees. Based on the scope of this prohibition:

• The conduct must be reciprocal: No violation where there is a contractual provision applicable to only one of the parties to not solicit or hire each other’s employees (i.e., no reciprocal obligations among the parties).

• Affiliation: The prohibition applies only to agreements between unaffiliated employers; it does not apply to agreements between affiliated employers (i.e., two or more corporate entities controlled by a common parent).

Enforcement guidance on wage-fixing and no-poaching prohibitions (the “Guidance”) has been issued by the Canadian Competition Bureau (the “Bureau”) to provide the Bureau’s general approach concerning interpreting, administering, and enforcing the prohibitions to ensure there is no undermining of competition or hinderance of the efficient allocation of resources. It will likely be updated once the new provisions are enacted.

The Guidance makes it clear that the scope of the: (a) wage-fixing prohibition will be interpreted to include the responsibilities, benefits, and policies associated with a job (e.g., job descriptions, per diem allowances, non-monetary compensation such as working hours, and other directives that may restrict an individual’s job opportunities; and (b) no-poaching agreements will include all forms of agreements between employers that limit opportunities for their employees to be hired by the other.  

Contravention of Subsection 45(1.1) is per se illegal

Wage-fixing and no-poaching agreements that are “naked restraints” on competition, including “restraints on wages or job mobility that are not implemented in furtherance of a legitimate collaboration, strategic alliance or joint venture,” will be per se illegal under section 45(1.1). 

What does per se illegal mean?  Certain acts or agreements are deemed harmful to competition and are therefore illegal without requiring proof of anti-competitive effects.  

Given that the Subsection 45(1.) is part of the criminal conspiracy provisions of the Act, the Crown must establish the offence “beyond a reasonable doubt” (i.e., the higher criminal standard of proof) before a defendant can be found guilty and subject to criminal sanctions.  

That is not the end of it, though. Where the Crown can’t make a criminal case the Commissioner of Competition may civilly. That is – review wage-fixing and no-poaching agreements or other arrangements under the civil agreements provisions of the Act.

Enforcement of Section 45(1.1): employment relationship

The prohibition is limited in scope to employment-related agreements, namely agreements between unaffiliated employers about their employees. Whether an employer-employee relationship exists will depend on the facts, circumstances, and the relevant laws under which the relationship was entered into. Recall the distinction between employee, independent contractor, and dependent contractor relationships.

Notably, the Guidance expressly acknowledges the significance that non-solicitation clauses can play in the purchase of a business. In such circumstances the Bureau will generally not assess wage-fixing or no-poaching clauses that are ancillary to merger transactions, joint ventures, or strategic alliances under the criminal track given that there are distinctions between no-hire and non-solicitation clauses in the context of transactions or strategic alliances.

Practical implications and takeaways

• Upon coming into force subsection 45(1.1) will only apply to new agreements entered into by employers on or after such date. That being said, the Guidance notes that the prohibition will also apply to “conduct that reaffirms or implements older agreements”. This suggests that once it is in force, prospective “no-poach” obligations imposed under agreements (as well as the remaining time-limited obligation imposed in respect of previously terminated agreements) risk being in contravention of the prohibition.

• Employers must be mindful of language in contracts that inadvertently impose such reciprocal obligations (e.g., “neither party” and “each other”) when entering into agreements with one another.

• Most importantly: These prohibitions on their own do not limit employers’ contractual ability to require departing employees not to solicit other employees for a defined term following their departure.