It's understandable that employers would want to prevent employees — especially superstars or those with hard-to-find skills — from being lured away by competitors. But there are some legal tripwires to watch out for when it comes to creating "no-poach" agreements. Three attorneys from Nixon Peabody LLP, along with an economist from Analysis Group, laid out some key considerations and best practices for employers in a recent webinar.

'Naked' agreements are illegal

A no-poach agreement is an agreement with another company, or companies, not to compete with each other with respect to each other's employees, said Alycia Ziarno, a partner in Nixon Peabody's Washington, D.C., office. This includes agreements not to solicit or recruit another's employees, as well as agreements not to hire each other's employees.

Similarly, a wage-fixing agreement is an agreement with another company, or companies, regarding employees' salaries or other forms of compensation. This can include traditional "price fixing," agreements based on a specific salary level or salary range, and agreements on components of wages such as bonuses, commissions, stock options and so forth.

In an October 2016 Antitrust Guidance for Human Resource Professionals, the Department of Justice (DOJ) announced that, going forward, it would consider proceeding criminally against "naked" or per se no-poach and wage-fixing agreements among competing employers, Ziarno said. Such agreements are considered per se violations of the antitrust laws, meaning they are automatically unlawful.

A naked or per se agreement is "separate from or not reasonably necessary to a larger legitimate collaboration between the employers," according to the DOJ guidance, and "deemed illegal without any inquiry into its competitive effects." Ziarno noted that there has been no change in DOJ policy regarding tailored ancillary agreements, such as those relating to a merger or joint venture.

Franchises a key target

In July 2018, seven fast-food franchisors agreed not to enforce no-poach agreements nationwide, following an action brought under state law after an investigation by Bob Ferguson, Attorney General of Washington state, said Ronaldo Rauseo-Ricupero, counsel in Nixon Peabody's Boston office.

Eight additional fast-food chains settled in August, with seven more franchisors settling in October — and the latter group expanded beyond restaurants to include fitness centers and auto shops. Rauseo-Ricupero said state Attorneys General are focusing on low-wage industries, with cleaning, personal services and retail all likely targets.

One franchise that has refused to settle is Jersey Mike's, a sandwich shop with 1,300 locations nationwide. On October 15, 2018, AG Ferguson filed a single-count complaint alleging a per se violation of the Washington State Consumer Protection Act; Rauseo-Ricupero said this will serve as a test case for stakeholders.

FTC enforcement activity

The Federal Trade Commission (FTC) has been entering the fray on the civil side, said Brian Whittaker, an associate in the firm's Washington, D.C., office. He discussed a July FTC settlement involving two competing medical staffing agencies that allegedly exchanged information about therapist wages and agreed to lower pay rates for those in the Dallas-Fort Worth area. The companies were also accused of inviting other staffing agencies to collude.

The medical staffing agencies settled with FTC and agreed not to exchange information about wages, agree on wages paid to respective staff members or invite competitors to collude on pay rates.

While the FTC settlement was civil, Whittaker said that the same facts could have triggered a DOJ criminal investigation. He also noted that this case turned primarily on text messages sent between the medical staffing agencies — something that could become more common with the rise of texting as a means of communication.

Economic considerations

Jee-Yeon Lehmann, vice president at the Boston office of Analysis Group, said wage-fixing agreements have direct effects on compensation through one or more channels. These include wage surveys, communications about offers and communications about forward-looking wage targets.

No-poach agreements, if effective, also have indirect effects on compensation through one or more channels. They can cause reduced competition for employees, reduced mobility of employees and reduced information available to employees about jobs and compensation at other firms.

In terms of class actions, effects are often alleged to spread to employees not directly covered by these agreements, so the economic analysis often requires assessing whether an agreement involving one set of workers may have implications for other employees within the same firm.

She also noted that the distinction between salaries and compensation is important for the analysis of liability and damages. Because total compensation includes a number of components — base wages, performance bonuses, overtime pay, stock options and fringe benefits — agreements to coordinate compensation may be more difficult to reach, monitor and enforce than wage-fixing agreements, she said.

Key takeaways for employers

Ziarno concluded the webinar with some key takeaways for employers:

• If you have not done so already, take a look at your hiring and compensation practices to see if there are information exchanges or any agreements with competing employers inside or outside of your industry; the important question is whether you compete in the same labor market.
• Counsel and train HR personnel and hiring managers about the do's and don'ts of communicating inside or outside of your industry about salaries (including salary components), benefits or other terms of employment. Properly structured wage surveys may be okay.
• Direct HR personnel and hiring managers to not enter into agreements, whether implicit or explicit, with competing employers to not solicit, recruit or hire competing employers' employees without legal involvement. Again, this may be permissible in an ancillary situation like a transaction or joint venture.
• If you are defending civil litigation involving a no-poach agreement, in addition to normal defenses, consider labor market definition issues (geographic component, classification/types of employees involved, specialized skill sets) and the economic issues/impact. If you receive a government inquiry, proceed with caution as responses may, in some circumstances, be obtained by private plaintiffs through discovery in class actions.
• If you are involved in mergers and acquisitions in any industry, consider whether labor market competition issues may arise in addition to the sell side product/service market issues you expect to encounter, and consider what market-related emails/documents may be revealed in the course of a merger review.