Does an arrangement between employers not to hire each other’s employees restrict competition in labour market and is against free market principles? The answer lies in competition laws.Skilled employees and capital are the two crucial components for a successful business. An employer’s desire to retain top talent is driven by the fact that it is hard to find outstanding performers in today’s competitive market. Employers retain employees by contractual obligations, specials perks or no-poaching agreements with competitors. A cold war has been brewing between domestic airlines on rampant poaching of pilots.
Last year, over 60 pilots of Jet Airways and Air India were poached by IndiGo. Air India approached the CCI against IndiGo for indulging in a predatory recruitment of trained pilots. The CCI, however, rejected the complaint summarily, terming it as ‘employment issue’. It observed that there is no bar on any airline from recruiting pilots belonging to other airlines. But the ministry of civil aviation is contemplating to put in place an ‘anti-poaching’ arrangement, requiring airlines to give an ‘informal commitment’ against poaching of cabin crew, pilots.
Does an arrangement between employers not to hire each other’s employees restrict competition in labour market and is against free market principles? The answer lies in competition laws.
In September 2010, the Antitrust Division of the US DoJ filed a complaint against Google, Apple, Adobe, Intel, Pixar and Intuit before a district court in San Jose, California, alleging that their agreements not to solicit/hire each other’s employees through ‘cold calling’ violated antitrust law. Cold calling is any solicitation for employment (by phone, email, letter or otherwise) directed to an employee who has not applied for an open position.
Companies executing these agreements agree to notify each other when making offers to each other’s employees. The top executives of these companies were alleged to be involved in this conspiracy. The case was based largely on emails in which Apple co-founder Steve Jobs, former Google CEO Eric Schmidt and some of their rivals detailed plans to avoid poaching each other’s prized engineers. One such email was sent to Jobs by Schmidt, who said, “the company was terminating ‘within the hour’ a recruiter who contacted an Apple employee in violation of the companies ‘do not call policy’.
Apologies again on this, should this ever happen again please let me know immediately and we will handle. Thanks!! Eric.” Jobs responded with a smiling emoticon. The DoJ held that these agreements eliminated a significant form of competition to attract skilled employees, distorting the labour market and causing employees to lose opportunities for better jobs and higher pay. Then, companies agreed to pay $415 million (R2,755 crore) claims in the class action lawsuit. Consequently, Apple and Google’s board of directors were hit with a shareholder derivative lawsuit for breach of fiduciary duty and harming the company by engaging in illegal anti-poaching agreements.
Similar complaints were filed by employees against Oracle, Novell, Google, Microsoft and Sun Microsystems, and one against DreamWorks Animation, Walt Disney, Pixar and Sony. Recently, DreamWorks Animation and Sony agreed to pay $63 million (R421 crore) to settle a proposed class action lawsuit.
In October 2016, a former LG employee lodged a suit in California federal court accusing LG and Samsung of illegally agreeing not to poach each other’s workers.
The complainant cited a 2010 news report in The Economic Times titled “Anti-poaching pacts are back; hiring hits fast lane”, in which the HR head of LG confirmed existence of an ‘understanding’ not to hire the other company’s employees. According to this, no-poaching agreements exist between top Indian companies across sectors. The top officials of a consumer electronic goods company and a soft drink major confirmed of having no-poaching agreements with their counterparts.
Following actions by the DoJ, serious questions arise on the legality of such agreements, and have received considerable attention on both sides of the Atlantic. Indian competition law is modelled on US and EU competition laws. The Competition Act, 2002, prohibits an agreement or understanding between companies, which can have appreciable adverse effect on competition (AAEC) in India. Agreements between competitors for fixing price, controlling production or supply, market allocation and rig bids (cartel agreements) are presumed to have AAEC. Globally, cartels are recognised as supreme evil of antitrust, resulting in pernicious effects on consumer welfare.
HR firms facilitating such deals can fall foul of competition law. From a competition law perspective, firms that compete to hire or retain employees are competitors in employment marketplace, regardless of whether they make the same products or provide the same services. It is unlawful for competitors to expressly or implicitly agree not to compete with one another. No-poaching agreements might be permissible in situations when two companies agree to participate in a joint venture or M&A.
In 1998, the entire sales team of Pepsi India joined Coca-Cola. Pepsi went to the Delhi High Court seeking injunction against Coca-Cola. The court held that rights of an employee to search for better employment cannot be restricted by an injunction. Injunction cannot be granted to create a situation such as “Once a Pepsi employee, always a Pepsi employee.”
With employee mobility at an all-time high, retaining key employees is challenging. Traditional mechanisms are certainly imperfect tools, but illegal agreements with other firms are not an improvement. Companies should be mindful of the competition law when establishing employment policies. In October 2016, DoJ and US Federal Trade Commission issued guidance paper for HR professionals and others who are involved in hiring and compensation decisions.
It highlights that HR professionals often are in the best position to ensure that their companies’ hiring practices comply with competition laws and consumers can also gain from competition among employers because a more competitive workforce may create more or better goods and services. In sum, an employer that takes a careful approach and crafts narrow solutions (i.e. carefully drafted employment agreements) stands a good chance of lawfully retaining its valuable employees, or at least keeping them from competitors.