Hong Kong Warns Employers Against Wage-Fixing and No Poach Agreements

On 9 April 2018, the Hong Kong Competition Commission (HKCC) published an Advisory Bulletin (Bulletin) on anti-competitive practices in the employment marketplace (see here). In the press release accompanying the Bulletin (see here), the HKCC reports that it has encountered situations where businesses have engaged in coordinated practices related to employment terms and conditions, or hiring in general, that may give rise to concerns under the First Conduct Rule in the Competition Ordinance (CO).

The Bulletin in brief:

• Businesses are subject to competition law when competing to hire staff
  Businesses that compete with each other to hire employees are competitors in the relevant labour market, regardless of whether they compete downstream.
• No “wage-fixing”
  Businesses must not exchange information about their intentions in relation to employee compensation or reach agreements in relation to any element of compensation.
• No “no poach” agreements
  Businesses that reach an agreement in relation to the solicitation, recruitment, or hiring of each other’s employees, or exchange information about their intentions in this area, are engaged in market sharing.
• Penalties
  The Bulletin does not indicate what penalties await violators, but cartels can attract pecuniary penalties of up to 10% of a company’s group turnover in Hong Kong under the CO.
• Leniency is available for businesses engaged in anti-competitive employment practices
  HKCC encourages businesses that may have contravened the CO to self report and cooperate with the HKCC.

This alert discusses the HKCC’s policy in respect of wage-fixing and no poach agreements as explained in the Bulletin, reviews similar recent policy statements and related practice overseas, and offers some practical compliance guidance for companies and their HR professionals. 

The Bulletin

The HKCC considers there can be competition between businesses within a market for the procurement of labour inputs. The HKCC explains that businesses that compete with one another to hire employees are competitors in the relevant labour market, regardless of whether they compete downstream in the sale of particular products or services. It follows that the First Conduct Rule (which controls anti-competitive agreements) can apply to any agreement between businesses not to compete in the procurement of labour. HKCC advises, however, that it “may choose to prioritise a matter [i.e. investigate and prosecute] if the undertakings are also competitors or potential competitors in the downstream market.”

The Bulletin explains that competition concerns arise in two situations:

• First, if two or more businesses conclude an agreement in relation to compensation, or any element of compensation, or exchange information about their intentions with respect to compensation, they are, in effect, agreeing to fix the price of labour. “Compensation” is not limited to salaries but extends to other employee benefits and allowances including insurance benefits, housing allowances, relocation support, severance payments, and so on.
• Second, if two or more businesses conclude an agreement in relation to the solicitation, recruitment, or hiring of each other’s employees (so-called “no poach” agreements) or engage in a concerted practice with like effect, they are sharing a market.

HKCC states that these arrangements have the object of harming competition. That is, the arrangements are cartel practices which can be sanctioned regardless of their anticompetitive effects and, moreover, HKCC is not obliged to establish any actual or likely effect on competition.

HKCC states that where it has “reasonable cause to suspect” that businesses have engaged in the above types of practices, it will take “appropriate [although unspecified] enforcement action.” HKCC advises that if businesses have contravened the CO by engaging in wage-fixing or no poach conduct, they should consider making an application for “lenient treatment”—typically in the form of immunity from fines. While this may imply that HKCC considers wage-fixing and no poach agreements to be “serious anti-competitive conduct” under the CO, that terminology is not used in the Bulletin. If conduct is not “serious anti-competitive conduct,” HKCC may not initiate enforcement action before the Competition Tribunal without first issuing a Warning Notice to the parties offering them an opportunity to “mend their ways.” As only the Competition Tribunal can impose financial penalties under the CO, in practice, fines can be avoided if conduct is not serious anti-competitive conduct so long as the parties comply with the Warning Notice by discontinuing their anti-competitive conduct.

In addition to offering an overview of the application of the CO to anti-competitive practices in employment markets, the Bulletin includes a “Questions and Answers” compliance guide for HR professionals and employers.  Here the HKCC advises businesses to avoid sharing information as to their future intentions with respect to salaries and benefits whether directly or indirectly through an independent third party. Such exchanges of future information will be considered to have the object of harming competition. By contrast, the exchange of historical salaries and benefits information may be permissible if the exchange is “achieved through the appointment of an independent third party that will collect historical data” from the businesses before collating the data and distributing it in aggregated and anonymised form.

Practice in the US and EU

Employment-related competition has been a focus of regulators in other jurisdictions in recent years. The US Department of Justice and Federal Trade Commission issued Antitrust Guidance for Human Resource Professionals in October 2016 (see here) (HR Guidance). The HR Guidance demonstrates a clear intention on the part of the US authorities to “proceed criminally against naked wage-fixing or no-poaching agreements. These types of agreements eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been criminally investigated and prosecuted as hardcore cartel conduct.”

Beyond the policy statements in the HR Guidance, US antitrust enforcers have taken cases against companies in technology and other sectors where the parties have agreed not to “cold call” each other’s employees. The US Department of Justice also recently settled a case against two rail equipment suppliers that agreed not to compete for each other’s employees—see here. These cases were civil enforcement actions, however. By publishing the HR Guidance, the US has signalled a policy shift toward pursuing wage-fixing and no poach agreements under criminal law. Moreover, the US Assistant Attorney General for the Antitrust Division, Makan Delrahim, has stated that a handful of criminal cases are already in the pipeline (see here).

Other jurisdictions have taken an interest in these sorts of cases too.  Although the European Commission has not publicised any investigations to date, there are parallels with the purchasing cartel cases which the EU Commission has investigated (for example, the Car Battery Recycling Cartel case, in 2017, where three recycling companies were fined for fixing the purchase prices of scrap lead-acid automotive batteries). In 2010, the Court of Hertogenbosch in the Netherlands reportedly considered an agreement between 15 hospitals that had agreed not to solicit each other’s anaesthesiologists and not to pay supplemental wages to certain staff. The UK OFT (now the CMA) announced in 2013 that it would monitor wage-fixing conduct although it does not appear to have pursued any cases.

Compliance Do’s & Don’ts

The HKCC advises companies to “independently determine the policies they intend to adopt regarding employment terms and conditions, in particular employee compensation and how they solicit or recruit/hire employees.”

As noted, the HKCC has very helpfully included in its Bulletin a number of “Questions and Answers” hypotheticals aimed at assisting companies in identifying compliance risks. If businesses have not already done so, they would now be well advised to incorporate HR practices into their corporate antitrust compliance programmes and training—drawing inspiration from the scenarios explored in the Bulletin where necessary. The risk of not doing so may be significant: cartels can attract pecuniary penalties of up to 10% of a company’s turnover in Hong Kong under the CO; staff implicated can be subject to fines and directors disqualified.

The key competition compliance “Do’s & Don’ts” to be taken from the Bulletin include the following:

• Do not agree with other businesses (whether or not competing businesses):
• To fix the salaries, other compensation, and benefits of employees.  This will be equated with price fixing by HKCC.
• To not poach each other’s employees. This will be assessed as a market sharing cartel by HKCC. 
• Do not share with another business information about your terms of employment or employment policies in particular as regards salaries, proposed salary increases and the timing of increases, or proposed benefits.
• Do use strict safeguards when participating in salary and compensation benchmarking exercises or surveys through trade associations or other third parties. Data should be disseminated only if aggregated, anonymised, and historic. 
• Do independently determine the policies you intend to adopt regarding employment terms and conditions, in particular with respect to compensation and how you solicit or hire employees.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Philip Monaghan, an O’Melveny partner admitted to practice law in Hong Kong, England & Wales, and Ireland, Michael Tubach, an O’Melveny partner admitted to practice law in California and District of Columbia, Kieran Humphrey, an O’Melveny counsel admitted to practice law in Hong Kong, England & Wales, and Australia, and Charles Paillard, an O’Melveny associate admitted to practice law in France, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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