Employers tend to prefer experienced professionals as opposed to an employee with no prior experience, especially in markets requiring skilled workers with technical knowledge. However, during lateral hiring, an employee also takes with one the technical skills and experience acquired over the period of employment. To ensure benefit, from an employer's perspective, in lateral hiring...
Employers tend to prefer experienced professionals as opposed to an employee with no prior experience, especially in markets requiring skilled workers with technical knowledge. However, during lateral hiring, an employee also takes with one the technical skills and experience acquired over the period of employment. To ensure benefit, from an employer's perspective, in lateral hiring amongst competitors, non-poaching clauses are often added to agreements. Non-poaching agreements are contracts entered amongst employers, consenting to not solicit each other's employees. Traditionally, non-poaching agreements fall under the dominion of contract and employment law. However, these agreements may cause ripple effects in competition regulation as well.
Non poaching agreements should be differentiated from non-compete agreements. Non-compete agreements are entered into to protect commercially sensitive information which employees are privy to and investment made to develop employee skills. These contracts are entered into between an employer and employee. Thus, non-compete agreements usually give employees an opportunity to negotiate terms on their behalf. However non poaching agreement s are between two employers, not only restricting an employee's right to choose where one wants to work, but also distorting the market by controlling supply of workers who are usually skilled)
Interlink of non-poaching clause and competition law
Competition regulation ensures competitive markets and prohibit s anti-competitive conduct. Employees play an integral part in ensuring competing ability and growth of an entity. Apart from availability of monetary and infrastructural resources, it is the employee's skills and experience which give rise to innovation and increase the efficiency of production, sale, etc of a business. Competition is not only limited to goods and services but may also extend to the labour and talent hired.
Thus, employees often invest in monetary and non-monetary resources to train employees and instil the required skills. Consequently, during a lateral shift, an employee is taking such acquired skills to competitors. This deters an employer's efficiency and ability to innovate, requiring the employer to re-invest in a new employee again from scratch. This is witnessed in markets which have a high demand for technical players. An employee may also take business relations and confidential information which would benefit the competitor. Thus, a non-poaching agreement is often entered into to protect an employer's interests during a lateral shift of employees.
However, there are two sides to the coin while considering the impact of non-poaching clauses on competition. These considerations have to be taken in to account with the fact that an employee has the right to practice his profession where he/she chooses. Further an agreement completely prohibiting employees to switch, without his consent taken into consideration, would be in restraint to trade, thus anticompetitive.
Non poaching agreements can be compared to anticompetitive horizontal market allocation since employers are agreeing to not compete with each other for labour, skill, talent and factors which are integral factors for production and efficiency.
Thus, no n poaching agreements cannot completely prevent employees from shifting, but agreements must set fair conditions to protect employers' rights and competitive standing in a market.
United States
The United States has considerable jurisprudence in non-poaching agreements and its impact on competition. In 2009, the Department of Justice received a complaint that tech companies had indulged in anti-competitive agreements by not directly soliciting and hiring employees from their competitors. In United States v. Adobe Sys., Inc[1]., the Department of Justice filed a complaint against Google, Apple, Adobe, Intel, Intuit and Pixar with respect to the agreements not allowing competitors to directly solicit and hire. The Department of Justice found such agreements anticompetitive since it prohibited competition of skilled employees and also decreased general competition in markets, thus impacting the employees. Further no substantial procompetitive justification for the same existed.
A similar stance was adopted in Nichols v. Spencer International Press, Inc.,[2] wherein two companies had a policy to neither allow employees to switch to competitors, nor would they hire from competitors. The Courts found that such agreements would disrupt competition in the supply of a service or commodity.
Thus, courts in the United States have usually not approved of non-poaching agreements completely prohibiting lateral shift in employment amongst competitors with the view that it would adversely disrupt competition.
With increased regulatory actions relating to non poaching agreements, the Department of Justice and Federal Trade Commission jointly issued the guidelines, 'Antitrust Guidance for Human Resource Professionals'[3] in 2016. The guidelines clarified that non poaching agreements would be considered as per se illegal and criminal action could be pursued by authorities.
India
India has taken a similar stance as United States with regards to non-switching of employees. Prior to the enforcement of Competition Act, 2002, Section 27 of the Indian Contract Act, 1872 regulated non poaching agreements. The right to practice any lawful trade which is not against public policy has been recognized by the Supreme Court in Gujarat Bottling v. Coca Cola Company AIR 1995 SC 2372. The Court further held that restricting clauses during the period of employment contract is valid but restrictive clauses extending beyond the period of employment were held to be void.
The Court took a similar stance in Pepsi Foods Ltd. and Others v. Bharat Coca-Cola Holdings Pvt. Ltd. & Others 81 (1999) DLT 122 and held that post termination clauses were in violation of Section 27 of the Indian Contract Act,1872 since it was an agreement restraining trade. Further, in American Express Bank Ltd. v. Ms. Priya Puri 2006 (110) FLR 1061, the Delhi High court upheld the rights of an employee to seek better employment and this cannot be restricted from the fact that the employee is privy to confidential information.
Despite non poaching agreements not being expressly covered by the Competition Act, 2002, they may fall under the scope of Section 3 agreements. Specifically, they would fall under Section 3(3) if such agreements determine the supply of skilled labour in the market. Such agreements are mandated to be void under Section 3 of the Competition Act, 2002. However, for non-poaching agreements to not be considered under this section, they should not have an adverse impact on competition and ensure freedom of trade by not restricting employees to work for competitors.
However Indian competition regime is still in a nascent stage and the Competition Commission of India is yet to interpret whether a non-poaching agreement completely banning lateral shift would fall under the scope of Section 3.
Singapore
Section 34 of the Competition Act of Singapore, 2004 declares agreements which prohibit solicitation of employees between competitors as anti-competitive and are also considered to have an adverse effect on competition. The exception to this provision is that if it leads to an overall economic benefit and the burden of proof is on the employer. There are different remedies provided under Singaporean law for those aggrieved by non-poaching agreements. Either a representative action can be filed or a private action can be filed by an aggrieved person against an entity infringing Section 34 of the Competition Act of Singapore.
Hong Kong
The Hong Kong Competition Commission issued the Advisory, 'Competition concerns regarding certain practices in the employment marketplace in relation to hiring and terms and conditions of employment,' stating that non poaching agreements can give rise to competition issues. The scope of the Advisory not only includes agreements between competitors but also competitors not competing for the same products or services. Under the Advisory, companies are advised to draw up their individual policies employment terms, which would include how employees are solicited. Businesses were also advised to not share their policies with other companies.
Conclusion
Thus, generally agreements between competitors prohibiting employees from switching jobs is not only against public policy but can also be considered anticompetitive as it acts as a restraint on trade. Most jurisdictions would approve of the same only if pro-competitive justifications can be proved before authorities. Albeit the presence of cases on non-poaching agreements and their impact on markets, the jurisprudence on overlap of labour and competition considerations is less, especially in India. Thus, competition regulators may find it relevant to issue guidelines and notifications on competitive concerns that employers have to take into consideration while setting employment terms. Agreements dealing with solicitation of employees have to be framed in a manner to comply with competition regulation