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Business Law Today

July 2023

Business Lawyers Beware: No-Poaching and Wage-Fixing Agreements Are Now Per Se Criminal in Canada

Summary

  • On June 23, 2023, amendments to the Canadian Competition Act come into force that prohibit agreements between unaffiliated employers to fix wages or terms or conditions of employment (Wage-Fixing Agreements) or not to solicit or hire each other’s employees (No-Poaching Agreements).
  • The wage-fixing prohibition deals with more than just salaries and wages, also making it an offense for unaffiliated employers to enter into agreements to fix, maintain, decrease, or control “terms and conditions of employment.” The no-poaching prohibition applies only to agreements between unaffiliated employers that are reciprocal or mutual in nature.
  • Any new Wage-Fixing Agreements or No-Poaching Agreements are now per se unlawful and expose the parties to those agreements to significant criminal penalties (i.e., prison sentences of up to 14 years and/or fines with no statutory limit), as well as to potential civil liability, including by way of class actions for damages.
  • The Canadian Competition Bureau has published wage-fixing and no-poaching enforcement guidelines. As detailed below, while those guidelines are hardly a model of transparency or clarity, they provide the business community with some comfort with respect to the scope and application of the new prohibitions.
Business Lawyers Beware: No-Poaching and Wage-Fixing Agreements Are Now Per Se Criminal in Canada
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In June 2022, the Canadian Parliament enacted amendments to the Competition Act (the Act) intended to prohibit agreements between unaffiliated employers to fix wages or terms or conditions of employment (Wage-Fixing Agreements) or not to solicit or hire each other’s employees (No-Poaching Agreements).

The amendments come into force on June 23, 2023, as subsection 45(1.1) of the criminal conspiracy provision in section 45 of the Act.

Once this occurs, any new Wage-Fixing Agreements or No-Poaching Agreements will be per se unlawful and expose the parties to those agreements to significant criminal penalties (i.e., prison sentences of up to fourteen years and/or fines with no statutory limit), as well as to potential civil liability, including by way of class actions for damages.

On January 18, 2023, the Canadian Competition Bureau (the Bureau), the law enforcement agency that administers and enforces the Act, released draft guidelines for public consultation describing its intended approach to enforcing the new criminal prohibitions (the Draft Guidelines).

On May 30, 2023, the Bureau published its final wage-fixing and no-poaching enforcement guidelines (the Final Guidelines). As detailed below, while the Final Guidelines are hardly a model of transparency or clarity, they provide the business community with some comfort with respect to the scope and application of the new prohibitions.

Final Enforcement Guidelines

The key takeaways for business lawyers and their clients from the Final Guidelines are these:

  • Wage-Fixing” Is a Misnomer: The wage-fixing prohibition deals with more than just salaries and wages, also making it an offense for unaffiliated employers to enter into agreements to fix, maintain, decrease, or control “terms and conditions of employment.”
  • One Way” No-Poaching Agreements Not Prohibited: The no-poaching prohibition applies only to agreements between unaffiliated employers that are reciprocal or mutual in nature.
  • Reasonable Clauses in Certain Categories of Business Agreements or Arrangements Should (Generally) Not Raise Concerns: The Final Guidelines confirm that the Bureau will “generally not” pursue a criminal investigation with respect to wage-fixing and no-poaching clauses that are ancillary to merger transactions, joint ventures, strategic alliances, franchise agreements, or staffing or IT service contracts, unless the wage-fixing or no-poaching clause in question is “clearly broader than necessary in terms of duration or affected employees, or where the business agreement or arrangement is a sham.” While the Final Guidelines offer some comfort, it is clear from certain statements in the Final Guidelines that the Bureau is prepared to second-guess the parties’ business judgement regarding the reasonable necessity of a given restraint and to take enforcement action to the extent that the Bureau concludes that an impugned restraint is “clearly” broader than reasonably necessary.
  • Ancillary Restraints Defence May be Available: Outside of the categories of business agreements and arrangements enumerated above, the so-called “ancillary restraints defence” will be available in any case where the parties to the impugned Wage-Fixing Agreement or No-Poaching Agreement (the Restraint) can show that:

(a) the Restraint is ancillary to, or flows from, a broader or separate agreement that includes the same parties;

(b) the Restraint is directly related to and reasonably necessary for achieving the objective of the broader or separate agreement referred to in (a) above; and

(c) the broader or separate agreement referred to in (a) above, when considered without the Restraint, does not violate subsection 45(1.1).

  • New and Ongoing Agreements Captured: The new prohibitions will only apply to new agreements entered into on or after June 23, 2023, except where the parties to agreements entered into before that date engage in conduct that reaffirms or implements those older agreements. Usefully, the Final Guidelines clarify that “at least two parties must reaffirm or implement the restraint for the Bureau to establish the […] consensus or ‘meeting of the minds’” required to ground liability.

    Accordingly, existing agreements need not be formally terminated in order to avoid criminal liability under the Act, but employers should be careful to avoid any conduct that could be seen as reaffirming or giving effect to agreements that precede June 23, 2023. The Final Guidelines also suggest that “employers may wish to update pre-existing company records and agreements, as they arise in the ordinary course, to ensure they accurately reflect its policies and intentions, and avoid unnecessary confusion.”

    Employers should also be mindful that they can be found liable even if their “agreement” was informal, verbal only, or entirely unspoken (e.g., a “wink” or a “nod”). Moreover, the existence of an “agreement” can be established based on circumstantial evidence, with or without direct evidence of communication between or among the alleged parties to it.

    We recommend that clients review all existing agreements with wage-fixing and no-poaching provisions with counsel in order to ensure that existing practices comply with the new prohibitions.
  • Employers Need Not Be Competitors: The new prohibitions apply to Wage-Fixing Agreements and No-Poaching Agreements between unaffiliated employers but do not apply to such agreements between affiliated employers. By way of example, the Bureau states that agreements between two or more corporate entities that are controlled by the same parent company do not violate the new prohibitions.

    The new prohibitions apply regardless of whether unaffiliated employers are competitors in the supply of a product (although the Bureau notes that it will prioritize its enforcement on Wage-Fixing Agreements and No-Poaching Agreements between employers that would otherwise compete in the purchase of labor).
  • “Employer” Broadly Defined: The definition of “employer” is broad and includes directors and officers, as well as agents or employees, such as human resources professionals. As a result, corporations may be vulnerable to liability if an offending agreement is entered into between an officer of one corporation and a director of the other, for example.
  • “Employee” Relationship to Be Evaluated on Case-by-Case Basis: Whether an individual is characterized as an “employee” for the purposes of the new prohibitions will be evaluated on a case-by-case basis and will depend on the laws and circumstances under which the relationship with that “employee” or “independent contractor” was entered into. Accordingly, the common law tests on whether a person is properly characterized as an employee or independent contractor may be relevant in considering whether the new prohibitions apply. The Final Guidelines include a reminder to employers that “depending on applicable legislation, their relationship with independent contractors could evolve over time. For example, if an employer treats an independent contractor as an employee, the business contract between them could transform into an employment relationship.”
  • Conscious Parallelism Not Prohibited: “Conscious parallelism” on its own will not be a violation of subsection 45(1.1). According to the Bureau, “conscious parallelism” occurs “when a business acts independently with awareness of the likely response of its competitors or in response to the conduct of its competitors.” However, the Bureau also cautions that parallel conduct coupled with facilitating practices (for example, sharing commercially sensitive employment information, such as employment terms) may be sufficient to prove that an illegal agreement was concluded.

Implications of the New No-Poaching and Wage-Fixing Prohibitions for Business Lawyers and Their Clients

  1. No-Poaching Agreements

    In section 2.2 of the Final Guidelines, the Bureau confirms that the no-poaching prohibition is limited to instances where unaffiliated employers agree not to poach “each other’s” employees. Therefore, as noted above, agreements must be reciprocal or mutual in nature in order to violate the no-poaching prohibition. “One-sided” or “one-way” agreements, where only one party agrees not to poach another’s employees, will not be an offense.

    Importantly, this means that customary one-sided no-poaching/non-solicitation clauses in confidentiality and non-disclosure agreements commonly used in the diligence phase of merger transactions, joint ventures, and strategic alliances will not be subject to enforcement action by the Bureau. It bears noting, however, that the Bureau’s interpretation of the Act is not binding on the courts, and private plaintiffs (including class action plaintiffs’ lawyers) may still seek to bring damages claims with respect to one-way agreements. In this regard, the Final Guidelines note that “[t]he courts are responsible for the final interpretation of the law.”

    Further, the Bureau cautions that “separate agreements between two or more employers that result in reciprocating promises not to poach each other’s employees” may trigger liability.
  2. Wage-Fixing Agreements

    The new prohibitions also criminalize so-called “wage-fixing.” As noted above, the prohibition makes it an offense for unaffiliated employers to enter into agreements to fix, maintain, decrease, or control not only wages and salaries but also “terms and conditions of employment.”

    In its Draft Guidelines, the Bureau specified that “‘terms and conditions’ 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 and non-compete clauses, or other directives that may restrict an individual’s job opportunities” but then unhelpfully undercut this guidance by adding that “[t]he Bureau’s enforcement generally is limited to those ‘terms and conditions’ that could affect a person’s decision to enter into or remain in an employment contract” (emphasis added). Despite extensive criticism of the overbreadth and unhelpfulness of this guidance, no clarification was provided in the Final Guidelines.

    Wages, salaries, and other terms and conditions of employment should therefore be treated as competitively sensitive information (CSI) in M&A diligence processes and in developing and implementing appropriate safeguards against the disclosure of CSI in the context of joint ventures, strategic alliances, and other commercial collaborations. Guidance should be sought in advance of providing due diligence information in order to ensure that CSI is not disclosed and that only “clean teams” gain access to CSI.

    In the preface to the Final Guidelines, the Bureau states that it “may revisit these Guidelines in the future in light of experience, changing circumstances and legal developments.” As time passes and experience with the new prohibitions grows, one may hope that the Bureau will indeed revisit its enforcement approach vis-à-vis merger transactions, joint ventures, strategic alliances, franchise agreements, and staffing and IT service contracts and, consistent with the economic and procompetitive benefits generated by such business agreements and arrangements, will limit the application of the no-poaching and wage-fixing prohibitions exclusively to circumstances where the broader (or separate) agreement between the parties is a sham.