Fair competition: why is it better for companies not to negotiate about not luring employees and the amount of wages? | Business

How do we evaluate such agreements today, comments Augustė Linauskaitė, a lawyer at TGS Baltic law firm.

Fair competition – also for working conditions

in 2023 The Competition Council published a memorandum on agreements restricting competition in labor markets. The memo broadcasted a message to the market that companies must compete fairly not only for the goods they sell, the services they provide, but also for attracting employees. The Competition Council indicated that employers’ agreements not to compete regarding the working conditions of employees, for example, not to hire staff of competing companies, to agree not to increase wages or provide other benefits, may significantly limit competition and therefore may be assessed as violations.

Company photo/Augustė Linauskaitė

In addition to examples of what these agreements are, how to avoid them, and the naming of exceptions, the memorandum of the Competition Council contained provisions that probably received the most attention:From the point of view of competition law, economic entities that compete with each other to attract or retain employees are considered competitors in the labor market, regardless of whether they operate in the same market for goods and services.“

In other words, the risk of violating competition law by agreeing not to entice employees arises not only when you are competitors, but also when you operate in different markets. For example, when concluding an agreement between a company providing IT services and a company providing financial services. Non-solicitation agreements are an extremely common practice in such vertical agreements. The aforementioned memorandum of the Competition Council sent a signal that companies should critically evaluate the need to enter into such agreements.

Penalties for illegal agreements and sports leagues

Earlier this year, the competition authorities of Norway, Sweden, Finland, Denmark and Iceland also published their assessment in a joint report on competition and labor markets. This report focuses on anti-alloyment and employee compensation arrangements between competitors and also highlights the risks of entering into such arrangements. The Portuguese supervisory authority has also drawn attention to the problems of competition law in labor markets.

In Lithuania and abroad, the practice of decision-making by supervisory authorities has so far developed more in the evaluation of agreements regarding employees between competitors in the market of goods and services. For example, the Portuguese football league was fined for an agreement not to lure players, the Polish and Lithuanian basketball leagues were fined for an agreement not to pay remuneration to players for a certain period during the coronavirus pandemic, and a Spanish forwarding company was fined for an agreement not to lure employees. However, the practice of not enticing employees in vertical agreements is not yet clear and developed.

Justifying non-compete agreements is extremely difficult

In light of the upheaval across Europe about the legality of these types of agreements, the European Commission (EC) published a report this year on the assessment of non-extraction and remuneration arrangements. The EC basically stated a similar position – agreements of this type pose a significant risk of violation of competition law and this is relevant for agreements not only between competitors.

The EC provided that such agreements would be possible in certain cases: (i) when there are no other less restrictive, effective measures for the same purpose; (ii) where the terms are of limited application, such as not covering all employees, are of limited and reasonable duration, limited territories. In order to be considered legal, such agreements must also meet the following requirements: improve the production of goods or promote technical or economic progress, consumers must receive a share of the benefits, restrictions must be necessary to achieve the goals, the parties should not eliminate competition in a significant part of the market.

However, the EC itself points out that there are unlikely cases where agreements to pay or not entice employees could be justified under these conditions. Furthermore, it is emphasized that less restrictive means of achieving the same goals can usually be found. The EC has not distinguished itself by discussing only horizontal type agreements, therefore, it is likely that such a position would be followed in relation to vertical agreements as well.

Thus, there is a certain possibility of concluding agreements on non-attraction of employees. Some of the exceptions, as mentioned, are specified by the Competition Council in its memorandum (for example, in the case of concentrations). However, in other cases, common in business practice, the mentioned requirements are not very specific, in practice, companies may face obstacles in assessing whether the agreement could meet the conditions discussed above. Therefore, it is generally advisable for companies to avoid such agreements and, if necessary, to consult with lawyers for maximum risk reduction.

We remind you that fines for competition law violations reach up to 10%. of annual global income, and managers may be restricted for up to five years from holding managerial positions and may additionally be fined up to 14,481 euros.