Within the past month, the Department of Justice Antitrust Division (the Division), in two separate matters, indicted a former owner of a health care staffing company for participating in a conspiracy to fix prices by lowering the rates paid to physical therapists and physical therapist assistants, and a health care company that owns and operates outpatient medical care centers across the country for agreeing with competitors not to solicit senior-level employees. (The Division’s press releases are available here and here.)
While this news may surprise some, it has always been the case that antitrust law applies to wage-fixing and to no poaching agreements. The Division and the Federal Trade Commission (FTC) reminded everyone of this fact in their October 2016 jointly issued “Antitrust Guidance for Human Resource Professionals” (hereafter HR Guidance). There, they expressly state that:
An individual likely is breaking the antitrust laws if he or she:
- agrees with individual(s) at another company about employee salary or other terms of compensation, either at a specific level or within a range (so-called wage-fixing agreements), or
agrees with individual(s) at another company to refuse to solicit or hire that other company’s employees (so-called “no poaching” agreements).
- When is an individual “likely” breaking the antitrust laws if he or she enters into a wage-fixing, or no poaching agreement? The answer is when such agreements are “naked.”
According to the HR Guidance, such agreements are “naked” when they are “separate from or not reasonably necessary to a larger legitimate collaboration between the employers.” More importantly, the HR Guidance put everyone on notice that the Division would “proceed criminally against naked wage-fixing or no-poaching agreements” such as those noted above.
The wage-fixing issue is particularly relevant now as employers continue to struggle with the poor economic conditions associated with the COVID-19 crisis and are thinking about pay cuts. Naturally, in making this decision, many companies will consider what their peers are doing in order to determine how their actions will be received in the marketplace. But as a business owner or executive, before you call one of your industry peers to see how they are handling employee compensation during the pandemic, you should stop and think twice about the potential antitrust implications of your actions.
In this context, you have to think of wage-fixing broadly. It is not just that you may face antitrust risk if you agree with any of your competitors, for example, to pay a particular lower hourly rate for certain categories of employees. You also risk a charge of wage-fixing if you agree to cut salaries by a certain percentage, reclassify some jobs as part-time, or coordinate in any other way on how to reduce employee costs.
And keep in mind that industry peers for these purposes are companies that not only compete with each other not only in the marketplace in which they offer their products and services, but also compete with each other for employees. And in fact, even companies that do not compete directly with each other in the products and services they offer may compete for employees when they are looking for employees with similar skill sets. (Our April 2020 alert on this point is available here.)
How can such agreements be reasonably necessary to a larger legitimate collaboration? Narrowly tailored no direct solicitation provisions, for example, are often included in severance agreements and rarely present competition concerns. (An example of a no direct solicitation provision is any agreement, or part of an agreement, among two or more persons that restrains any person from cold calling, soliciting, recruiting, or otherwise competing for employees of another person.)
The determination of whether a no direct solicitation provision is “reasonably necessary” and therefore somewhat less risky is not easy to make, in part because it is very dependent on the context in which it is proposed. And the key to “reasonably necessary” is “necessary.” In other words, simply folding a no direct solicitation provision into an agreement relating to a larger legitimate collaboration certainly makes it a part of that agreement, but it doesn’t guarantee that it will be seen as “reasonably necessary” to that agreement or that larger legitimate collaboration.
Some examples of contexts in which a no direct solicitation provision can be “reasonably necessary” include:
- mergers or acquisitions (consummated or unconsummated), investments, or divestitures, including due diligence related to such activities;
- contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies or providers of temporary employees or contract workers;
- the settlement or compromise of legal disputes; and
- contracts with resellers or OEMs; contracts with certain providers or recipients of services; or the function of a legitimate collaboration agreement, such as joint development, technology integration, joint ventures, joint projects (including teaming agreements), and the shared use of facilities.
While examples can be useful, keep in mind that there is no hard and fast rule and no “safe harbor” for making the determination about whether a no direct solicitation provision is “necessary” to the business arrangement. Past antitrust enforcement actions also make clear that when considering a no direct solicitation provision, it is best to:
- identify, with specificity, the agreement to which the no direct solicitation provision is ancillary;
- narrowly tailor the no direct solicitation provision to affect only employees who are anticipated to be directly involved in the arrangement;
- identify with reasonable specificity the employees who are subject to the no direct solicitation provision;
- include a specific termination date or event; and
- sign the agreement, including any modifications to the agreement.
If you are faced with a request for a no-solicitation provision, or for a discussion of how to manage employee costs, hit pause and engage antitrust counsel.