Employers, Take Note! Amendments to the Competition Act Have Criminalized Wage-Fixing and No-Poaching Agreements

Background

On June 23, 2022, significant amendments were made to Canada’s Competition Act (the “Act”) which will undoubtedly impact commercial and employment practices in Canada.^[1] While the majority of the amendments to the Act came into force immediately, specific amendments relating to wage-fixing and no-poaching agreements were held in abeyance and will not come into force until June 23, 2023. When these amendments do come into force, it will be a criminal offence for employers to agree to fix, maintain, decrease or control wages or other terms of employment, or to enter agreements to not solicit or hire each other’s employees.

Upon coming into force, the wage-fixing and no-poaching prohibitions will form part of the criminal conspiracy provisions in Section 45 of the Act, which is reserved for agreements between competitors to fix prices, allocate markets or restrict output, also known as “naked restraints” on competition. Other forms of competitor collaborations, such as joint ventures and strategic alliances, are also subject to review under the reviewable matters provisions in Part VIII of the Act.

Scope of Prohibition in Subsection 45(1.1)

Subsection 45(1.1) of the Act provides as follows: 

45(1.1) Every person who is an employer commits an offence who, with another employer who is not affiliated with that person, conspires, agrees or arranges:

a. to fix, maintain, decrease or control salaries, wages or terms and conditions of employment; or

b. to not solicit or hire each other’s employees.^[2]

Two key takeaways can be offered based on the scope of the above prohibition.

The Impugned Conduct Must Be Reciprocal

The prohibition is limited to reciprocal obligations among employers not to solicit or hire each other’s employees. Therefore, on its face, there would be no violation of 45(1.1) in the context of a contractual provision that applied to only one of the parties, rather than establishing reciprocal obligations among the parties to not solicit or hire each other’s employees.

Affiliation

The prohibition will apply only to agreements between unaffiliated employers and does not apply to agreements entered into by affiliated employers (i.e., two or more corporate entities controlled by a common parent).

A useful starting point to gauge the more nuanced scope of subsection 45(1.1) is the enforcement guidance on wage-fixing and no-poaching prohibitions (the “Guidance”) issued by the Canadian Competition Bureau (the “Bureau”).^[3] The Guidance sets out the Bureau’s general approach towards interpreting, administering and enforcing the prohibitions.

The wage-fixing prohibition in subsection 45(1.1)(a) extends beyond mere fixing of “salaries and wages” to any “terms and conditions of employment.” The Guidance expressly states that the scope of such prohibition will be interpreted to include the responsibilities, benefits and policies associated with a job. This may include job descriptions, allowances such as per diem and mileage reimbursements, non-monetary compensation, working hours, location, non-compete clauses and other directives that may restrict an individual’s job opportunities.

With respect to no-poaching agreements in subsection 45(1.1)(b), the Bureau has indicated that the scope will include all forms of agreements between employers that limit opportunities for their employees to be hired by the other.

The Guidance expressly asserts that wage-fixing and no-poaching agreements can be objectionable to the extent that such arrangements undermine competition and hinder the efficient allocation of resources. The Guidance articulates a direct linkage between protecting competition among employers and labour markets, and the outcome of higher wages and salaries, better benefits and more job opportunities for employees.

Contravention of Subsection 45(1.1) Is Per Se Illegal

The Bureau has expressly stated that 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).^[4] Under the per se standard, certain acts or agreements are deemed harmful to competition and are therefore illegal without requiring proof of anti-competitive effects. As with all criminal prohibitions, the Crown must establish the offence “beyond a reasonable doubt” before a defendant can be found guilty and therefore subject to criminal sanctions. However, even if the Crown cannot meet this high standard of proof, it is open to the Commissioner of Competition to review wage-fixing and no-poaching agreements or arrangements under the civil agreements provisions in Part VIII, found in section 90.1 of the Act.

Enforcement of Section 45(1.1)

The following general principles have been articulated in the Guidance to shed light on the Bureau’s approach to interpretation and enforcement of the new provision, and as further guidance as to the Bureau’s view of what will constitute “naked restraints” on competition.

Employers

The term “employer” has not been defined in the Act. However, the Bureau has previously defined “employer” to include “directors, officers, as well as agents or employees, such as human resource professionals.” This broad scope of interpretation underscores that subsection 45(1.1) will not likely require the parties to an agreement to be actual or potential competitors, and therefore may theoretically extend to capture parties to an agreement who are unaffiliated employers from different industries.

This has been identified as an area where the Bureau may benefit from additional clarity or a defined framework, which is particularly true as provinces and territories make occasional changes to their respective employment standards legislation which may impact the interpretation of such definitions.^[5]

Employment Relationship

On its face, the prohibition is limited in scope to employment-related agreements, namely agreements between (unaffiliated) employers regarding 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.^[6]

Ancillary Restraints Defence

In its Guidance, the Bureau expressly states that they will not enforce against “ancillary restraints,” which recognizes that certain business transactions or collaborations, by their nature, require restraints on competition to make them desirable, efficient or – in certain instances – possible.

The ancillary restraints defence (“ARD”) provides that parties to an agreement or term of an agreement that falls under the prohibitions in subsection 45(1.1) will not be convicted of the offences under subsection 45(1.1) if the agreement or the term of the agreement:

a. is ancillary to or flows from a broader or separate agreement or arrangement;

b. is “directly related” to, and “reasonably necessary” for giving effect to, the objective of that broader or separate agreement or arrangement; and

c. if the broader or separate agreement or arrangement, when considered alone, does not contravene subsection 45(1.1).^[7]

Although the Crown carries the onus of proving that the alleged agreement violates subsection 45(1.1), the onus is on the parties to the agreement to prove that the ARD, under subsection 45(3), applies. However, as noted above, it is open to the Bureau to review the conduct under the section 90.1 civil agreements provision contained within Part VIII of the Act.

The Bureau will examine the circumstances leading to the adoption of the restraint, including the submissions of the parties to the Bureau, evidence created during the evaluation and negotiation of the agreement that demonstrates the objectives of the agreement, and any evidence of alternative options considered by the parties at the time the agreement was negotiated.

In the Guidance, the Bureau expressly acknowledges the significance that non-solicitation clauses can play in many agreements for the purchase of a business and, in that regard, it 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.^[8] However, as identified by the Canadian Bar Association (“CBA”) Competition Law and Foreign Investment Review Section,^[9] the Guidance does not expressly cover other common and pro-competitive business arrangements requiring these clauses, such as professional services companies, consultancies and subcontractors (e.g., IT services), and recruitment agencies which are, in most cases, vertical arrangements for employment supply. Whether the Bureau will presumptively consider such arrangements as not being subject to scrutiny under section 45, or normally qualifying for protection under the ARD, are matters requiring further clarity.

The Guidance provides a helpful hypothetical scenario in which the ARD may be available to parties in the context of reciprocal no-poaching provisions in an agreement where “specialized labourers” are required for a short period (e.g., in the context of companies providing staffing and recruitment services). The ARD may apply if the parties can demonstrate that: (i) the no-poaching agreement flows from the broader staffing agreement; and (ii) it is directly related to and reasonably necessary for achieving the objective of the broader staffing agreement. In this example, the no-poaching agreement, being in effect only for the duration of the contract, would be a significant and positive factor. However, the Guidance also states that “employers should be aware that duration or other terms attached to an ancillary restraint, such as geographic scope, will be examined to determine whether they are ‘reasonably necessary.’” This underscores that further examples and explanations as the Guidance evolves will be welcome.

In addition to the importance of recognizing that non-solicitation provisions play a key role in specific arrangements related to legitimate protection of business interests, the CBA’s commentary identifies the need to clearly distinguish between no-hire and non-solicitation clauses in the context of transactions or strategic alliances, as well as a clear carveout for many unionized workplaces where an agreement is reached by virtue of collective bargaining. We have every reason to assume further guidance and examples will be provided by the Bureau with the new prohibition coming into force.

Information Sharing by Competitors

The Guidance distinguishes agreements from “conscious parallelism,” which occurs when a business acts independently with awareness of the likely response of its competitors or in response to the conduct of its competitors. While the Bureau does not consider mere conscious parallelism a violation of section 45, parallel conduct coupled with facilitating practices, such as sharing sensitive employment information or taking steps to monitor each other’s employment practices, may be sufficient to prove that an agreement was concluded. Under subsection 45(3), such conduct could result in an inference by the Bureau of an agreement between the parties in violation of subsection 45(1.1).^[10]

Given the prevalence of gathering information on competitors and monitoring the market, it is important to note that the Bureau is chiefly concerned with correcting mischief, and not punishing the lawful monitoring and gathering of information by employers for legitimate purposes. In view of the foregoing, employers are to avoid activities that assist, or could be regarded as assisting, their competitors in monitoring one another’s activities and practices to ensure that the conduct does not raise concerns under subsection 45(1.1) of the Act.

Practical Implications and Takeaways

Upon coming into force on June 23, 2023, subsection 45(1.1) will only apply to new agreements entered into by employers on or after such date. However, the Guidance expressly states that the prohibition will apply to “conduct that reaffirms or implements older agreements.” This broad interpretation effectively suggests that once subsection 45(1.1)(b) 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.

Moreover, the prohibition is clearly limited to reciprocal obligations among two or more unaffiliated employers to not solicit or hire each other’s employees. Therefore, on its face, there would be no violation of 45(1.1) in the context of a contractual provision that applied to only one of the parties, rather than establishing reciprocal obligations among the parties to not solicit or hire each other’s employees. Therefore, the parties should be mindful of language in contracts that inadvertently impose such reciprocal obligations (e.g., “neither party,” “non-breaching party,” “each other” and “other party”).

Similarly (and to clear up a common initial confusion on the part of employers), the application of the additional prohibitions on wage-fixing and no-poaching do not, on their own, limit an employer’s contractual ability to require departing employees not to solicit other employees for a defined term following their departure. However, such terms should be approached with the usual sensitivity of not being overly broad for the legitimate protection of business interests, and should not be confused with the well-established limitation (and now, in Ontario, legislative prohibition) on non-competition clauses, subject to narrow exceptions.