I. Introduction
Some employers may choose to enter into No-Poach Agreements, also known as no-hire or non-solicitation agreements, where each employer agrees not to recruit or hire each other’s employees. They enter into these agreements both to retain their employees and to limit their competitors’ recruitment efforts of their own employees.
No-Poach Agreements can be written or verbal, and they can range in formality. Explicit no-poach agreements are those documented through clear, written contracts. On the other hand, some No-Poach Agreements have been referred to as gentleman’s agreements, with no written formality. [1]
Overall, No-Poach Agreements can harm employees because they can impair an employee’s ability to seek new job opportunities and/or negotiate more favorable employment terms with other employers. For example, if an employee tries to seek employment with a competing employer, that employee may not get hired if the competing employer has a No-Poach Agreement with the employee’s current employer. This can be incredibly frustrating for an employee looking to work for a different employer.
No-Poach Agreements can also harm employees by artificially suppressing wages, since employers have less of a need to compete for talent in the labor market. This means that employees may not be able to negotiate for higher wages or benefits because of the lack of employee leverage created by the No-Poach Agreements. For example, if an employee earns a salary with their employer, and if their employer has entered into a No-Poach Agreement with a competitor, then the employee will not be able to negotiate for a higher salary with the competitor. This can be severely unfair to the employee.
The topic of No-Poach Agreements (and whether they are legal or not) falls within the category of antitrust law. This article will explore state and federal antitrust law to evaluate the legality of various types of No-Poach Agreements. This article will also discuss various scenarios and examples of No Poach Agreements. Finally, this article will explore the severe penalties an employer may face if they enter into an unlawful No-Poach Agreement.
II. What Is a No-Poach Agreement?
A typical No-Poach Agreement may have several different agreements and provisions. For example, a No-Poach Agreement may include agreements between two or more employers to:
- Refrain from soliciting or recruiting each other’s employees;
- Refrain from cold-calling employees at each other’s companies;
- Refrain from hiring a competitor’s employees, even if they apply independently without solicitation;
- Establish compensation ranges (or compensation limits) for classes of workers;
- Share data and information related to employee wages or compensation.
In the normal context of seeking talent in the labor market, employers typically compete with one another to retain the best talent for their companies. However, when competition is restrained (i.e., through No-Poach Agreements), employees experience the benefits of competition between employers that could result in better wages or employment terms. [2]
III. Are No-Poach Agreements Legal?
Across the country, several courts and federal administrative agencies have found No-Poach Agreements to be anticompetitive and therefore illegal under federal antitrust laws (the Sherman Antitrust Act of 1890) and California antitrust laws (the Cartwright Act).
Recently, a federal district court judge in California found that a group of employers “systematically shared information, agreed not to solicit each other’s employees, and that the purpose of the information sharing and no-poach scheme was to suppress wages.” [3] The Court then explained that “these allegations raise a plausible inference that Defendants entered into an express agreement to suppress compensation.” [4] As a result, the Court found that the employees alleged sufficient facts to demonstrate a “conspiracy to suppress the compensation of Defendants’ employees.” [5]
The Department of Justice (DOJ) Antitrust Division and Federal Trade Commission (FTC) are the federal regulatory agencies responsible for enforcing antitrust laws. Both agencies recently jointly published guidance that human resource professionals can use to ensure that their companies’ hiring practices do not violate antitrust law (the DOJ Guidance). The DOJ Guidance is clear that “agreements among employers not to recruit certain employees or not to compete on terms of compensation are illegal.” [6] The DOJ Guidance can be obtained on the DOJ website.
The DOJ has opined that “[a]n agreement among competing employers to limit or fix the terms of employment for potential hires may violate the antitrust laws if the agreement constrains individual company decision-making with regard to wages, salaries, or benefits, terms of employment, or even job opportunities.” [7]
IV. What About Implicit No-Poach Agreements or Simply Sharing Information with Competitors?
An employer should avoid entering into agreements regarding terms of employment with firms that compete to hire employees. [8] It does not matter whether the agreement is informal or formal, written or unwritten, spoken or unspoken. [9]
Even just sharing information may have an anticompetitive effect since it can lead to employers adjusting wages downward so that they are in line with wages in the industry. [10]
Sometimes, employers may share information with each other about employment terms and conditions, but they will not be part of an explicit agreement not to hire each other’s employees. Is this a violation of the antitrust laws? The DOJ Guidance opines that:
Sharing information with competitors about terms and conditions of employment can also run afoul of the antitrust laws. Even if an individual does not agree explicitly to fix compensation or other terms of employment, exchanging competitively sensitive information could serve as evidence of an implicit illegal agreement. While agreements to share information are not per se illegal and therefore not prosecuted criminally, they may be subject to civil antitrust liability when they have, or are likely to have, an anticompetitive effect. Even without an express or implicit agreement on terms of compensation among firms, evidence of periodic exchange of current wage information in an industry with few employers could establish an antitrust violation because, for example, the data exchange has decreased or is likely to decrease compensation. For example, the DOJ sued the Utah Society for Healthcare Human Resources Administration, a society of HR professionals at Utah hospitals, for conspiring to exchange nonpublic prospective and current wage information about registered nurses. The exchange caused defendant hospitals to match each other’s wages, keeping the pay of registered nurses in Salt Lake County and elsewhere in Utah artificially low. [11]
V. What Are Some Examples of No-Poach Agreements?
The DOJ Guidance provides some sample questions and answers to illustrate examples of No-Poach Agreements, and whether they are lawful. The following questions and answers are direct quotes from the DOJ Guidance. They have been shortened for brevity (as indicated by various ellipses shown as a “...”). These questions and answers have been published at DOJ Antitrust Division and Federal Trade Commission, Antitrust Guidance for Human Resource Professionals, as follows:
Question: I work as an HR professional in an industry where we spend a lot of money to recruit and train new employees. At a trade show, I mentioned how frustrated I get when a recent hire jumps ship to work at a competitor. A colleague at a competing firm suggested that we deal with this problem by agreeing not to recruit or hire each other’s employees... What should I do?
Answer: What that colleague is suggesting is a no-poaching agreement. That suggestion amounts to a solicitation to engage in serious criminal conduct. You should refuse her suggestion and consider contacting the Antitrust Division’s Citizen Complaint Center or the Federal Trade Commission’s Bureau of Competition to report the behavior of your colleague’s company. If you agree not to recruit or hire each other’s employees, you would likely be exposing yourself and your employer to substantial criminal and civil liability.
Question: My friend and I are both managers at different companies in an industry where employee wage growth seems to be out of control. Over lunch, my friend proposed that we could solve this problem by reaching out to other industry leaders to establish a more reasonable pay scale for our employees. Is this legal?
Answer: An agreement among competitors to set wages or establish a pay scale is an illegal wage-fixing agreement. If you take your friend’s suggestion and form such an agreement on behalf of your company with your friend or others acting on behalf of their companies, you would likely be exposing yourself and your employer to substantial criminal and civil liability.... Additionally, merely inviting a competitor to enter into an illegal agreement may be an antitrust violation—even if the invitation does not result in an agreement to fix wages or otherwise limit competition. In antitrust terms, an “invitation to collude” describes an improper communication to an actual or potential competitor that you are ready and willing to coordinate on price or output or other important terms of competition.
Question: I work as a senior HR professional at a nonprofit organization that works hard to keep costs down so we can serve more people. One idea we had is to cap wage increases for certain employee groups, but we are worried that we might lose employees to other nonprofit organizations that don’t cap wage increases. So, I would like to call other nonprofit organizations in my region to ask them if they would consider a cap on wage growth rates as well. Should I do that?
Answer: No. You would likely violate antitrust law if you and the other nonprofit organizations agreed to decrease wages or limit future wage increases. A desire to cut costs is not a defense. Your nonprofit organization and the others are competitors because you all compete for the same employees. It does not matter that your employer and the other organizations are not-for-profit; nonprofit organizations can be criminally or civilly liable for antitrust law violations.
Question: I work in the HR department of a university that sometimes gets into bidding wars to attract faculty from rival institutions. Those efforts rarely succeed, but they take up a lot of time, energy, and resources. Recently someone in the Dean’s office told me that we now had a “gentleman’s agreement” with another university not to try to recruit each other’s senior faculty. There isn’t a written agreement, and efforts to hire each other’s faculty were rarely successful. Is this okay?
Answer: No. An illegal agreement can be oral; it need not be written down on paper.... If you stopped recruiting and bidding for faculty from another university due to a gentleman’s agreement, you have become a member of that no-poaching agreement and could be subject to criminal liability.
Question: I am the CEO of a small business. In my industry, firms traditionally offer gym memberships to all employees. Gym membership fees are increasing, so I would like to stop offering memberships, but I am worried that current employees will become disgruntled and move to other companies. I would like to ask other firms in the industry to stop offering gym memberships, as well. Can I do that?
Answer: No, you would likely violate antitrust law if you and the other companies agreed to cease offering gym memberships. Job benefits such as gym membership, parking, transit subsidies, meals, or meal subsidies and similar benefits of employment are all elements of employee compensation. An agreement with a competitor to fix elements of employee compensation is an illegal wage-fixing agreement.
All the above questions and answers can be found in the DOJ Guidance at Department of Justice Antitrust Division and Federal Trade Commission, Antitrust Guidance for Human Resource Professionals.
VI. What Are the Consequences of Entering into an Illegal No-Poach Agreement?
As discussed, numerous courts and administrative agencies have found that No-Poach Agreements are illegal under federal and state antitrust laws. “Violations of the antitrust laws can have severe consequences. Depending on the facts of the case, the DOJ could bring a criminal prosecution against individuals, the company, or both. And both federal antitrust agencies could bring civil enforcement actions. In addition, if an employee or another private party were injured by an illegal agreement among potential employers, that [individual employee] could bring a civil lawsuit for treble damages (i.e., three times the damages the party actually suffered.)” [12]
The consequences for violations can be severe and vary based on the nature and gravity of the agreement. The DOJ could bring a criminal prosecution against individuals, companies, or both, and both the DOJ and FTC can bring civil enforcement actions. [13]
A. Criminal and Civil Penalties
Under federal law (Section 1 of the Sherman Act), violations could result in a federal felony conviction with any of the following punishments:
- Fine not to exceed $100 million for corporation. [14]
- Fine not to exceed $1 million for any other person. [15]
- Imprisonment not to exceed 10 years. [16]
Under California law, the Attorney General or the district attorney of any county may bring criminal or civil proceedings, depending on the severity of the employer’s action. [17] The following penalties may apply:
- For a corporate entity, the greater of a fine of $1 million or amount of the financial gain from the violation, multiplied by two. [18]
- For an individual, the greater of a fine of $250,000 or amount of the financial gain from the violation, multiplied by two. [19]
- Imprisonment for up to three years. [20]
- Businesses may also forfeit their right to conduct business in California. [21]
B. Private Party Litigation Exposure
If a No-Poach Agreement has harmed an individual employee (or group of employees), that employee may have a private cause of action for injuries stemming from the No-Poach Agreement. Section 4 of the Clayton Act allows private litigation for injured parties related to antitrust violations. [22] An employee who prevails may be entitled to treble damages (again, this means three times the damages the party actually suffered), interest accrual on damages, and attorney’s fees under both California and federal law. [23] These damages can add up significantly. Moreover, if a group of employees has been affected by the No-Poach Agreement, then those employees may potentially even bring class action litigation against conspiring employers for their violation of the antitrust laws. [24]
VII. Corporate Leniency Policy
The DOJ Antitrust Division provides “significant, predictable, and transparent incentives for corporations to make voluntary self-disclosures and cooperate in criminal antitrust investigations in exchange for non-prosecution protections for the corporate entity and its cooperating personnel.” [25] “Individuals are also eligible for non-prosecution protection under the Individual Leniency Policy if they self-disclose their participation in an antitrust cartel and meet the policy’s requirements.” [26]
According to the DOJ Guidance, “[i]f HR professionals or other interested parties have information about a possible antitrust violation regarding agreements among competitors to fix wages, salaries, benefits, or other terms of employment, or agreement not to compete for employees in hiring decisions, the federal antitrust agencies encourage them to report such conduct.” [27] The DOJ Guidance further explains that “[w]ith respect to potential criminal violations, in particular, it can be beneficial to report personal involvement in an antitrust violation quickly. Through the Division’s leniency program, corporations can avoid criminal conviction and fines, and individuals can avoid criminal conviction, prison terms, and fines, by being the first to confess participation in a criminal antitrust violation, fully cooperating with the Division, and meeting other specified conditions.” [28]
Even though an employer may have originally entered into a No-Poach Agreement, they may elect to rescind the agreement and voluntarily report their conduct to the DOJ under the DOJ’s Corporate Leniency Policy. [29] This leniency program applies to both companies and individuals.
VIII. Conclusion
As demonstrated above, numerous courts and federal and state agencies have found that No-Poach Agreements are illegal under state and federal antitrust laws. These No-Poach Agreements can be either explicit (i.e., in writing) or implicit (verbal and informal). Regardless, the penalties for entering into such an agreement are severe.