Reducing anti-competitive practices in employment

Welcome to the latest episode of Gowling WLG's Employment Essential Podcast where we will discuss the latest developments and challenges affecting employment law in the UK.

Jonathan Chamberlain: Hello and welcome to this podcast from Gowling WLG. My name is Jonathan Chamberlain. I am a partner in the Employment, Labour and Equalities team and I am really pleased for this that I am joined by my partner, Bernardine Adkins. Bernardine, would you like to introduce yourself?

Bernardine Adkins: Yes hello, for my sins I have been at Gowling WLG longer than I care to remember and I am head of the EU, Trade and Competition team.

Jonathan: Which is not someone that you would expect to find on one of our employment podcasts but let me explain. The Competition and Markets Authority has introduced new guidance, and perhaps is introducing a new focus, on anti-competitive practices in the HR sector, in relation to employees. And Bernardine tells me that this is really quite important. Bernardine, why?

Bernardine: Because there are consequences. Compliance with the competition rules is mandatory, it is not something you can contract out of. And the first thing that normally makes people pause for thought is where a company is evolved in, what we call, a 'hard core breach' of the competition rules, such as price fixing or colluding as to conditions of competition that they offer each other between competitors. The fines you are looking at, or the penalties, are up to 10% of the annual group turnover, and that's group turnover, not just the small Mamas and Papas company. If it is owned by a much larger, for example US corporation, that cap is set by reference to the parent company because if you are big, the idea is the CMA, the Competition and Markets Authority, want those penalties to hurt. But frankly, time and time again over the years, a chairman will say to me Bernardine I can write… OK it would be a sizeable cheque, I can write it tomorrow, but what will really hurt me is the reputation - because being found to be in breach, serious breach of the competition rules hurts a company's reputation and that matters more than anything. But a dynamic we see nowadays, also which we never saw in previous years, was the possibility for damages claims. So now we have in the UK, class action damages claims such as we have seen over the years in the US, and so it means that these arrangements yes it takes a number of years to clean up, deal with the CMA, but then we have that the 'swish of a dragon's tail' as I call it, we have these follow on damages claims that come out involving downstream consumers, who arguably allegedly have paid more for their goods and services as a result of the collusive agreement, and so it goes on. So in short, it is best not to engage in these arrangements because of the world of pain that comes a company's way as a result.

Jonathan: So, possibly huge fines, massive reputational damage, possible follow on litigation where you are being sued directly by people who have been affected by this. OK, that is bad enough…

Bernardine: …Yes and I have not mentioned the lawyer's fees there either.

Jonathan: I do not see those necessarily as a negative impact. However, let's move on. What about the impact on the labour market? What are the Competition Authority worried about here?

Bernardine: Well, it is interesting because we are seeing this movement of concern about anti-competitive behaviour within employers in the US, that came at the time of the Obama administration and that was regarded at the time as having an adverse societal effect - bad for labour markets, bad for people - it is adverse to the American dream. The UK, we are much more purist, we are much more neo-liberal. We do tend to make a distinction that employees are really factors of production, they are an important cost element. So, if a company starts to fix or collude or swap information on their costs and if it is a large part of their costs, necessarily they don't have to fix their own prices necessarily because their costs are at a plateaux, their own prices will be more likely to be at a plateaux so that is regarded as a bad thing. So, it is interesting in the UK, as I said, we are much more purist in terms of saying this from an economic perspective is adverse and we are less concerned with well this is just jolly unfair on the employees, in that they are not afforded the possibility of actually being able to negotiate a higher wage commensurate with inflation etc. etc. because they are competitors in that particular market of the sector are all talking to each other and making sure that those wages are suppressed.

Jonathan: So this is not about fairness as such, a concept which HR professionals are very familiar. It is not about social justice, it is about economics, it is about distorting the markets.

Bernardine: Yeah absolutely from a UK perspective. That may evolve over time because there is a discussion which some competition lawyers dismiss as 'hipster economics', that says that competition law should do a lot more, it should care about remedying societal ills, but the old school purists says no this absolutely has to be about pure economics. And from that perspective, from a pure economics perspective, it actually stacks up that the regulators should intervene where there are these agreements as between employers viz a viz what they pay their staff and how they recruit their staff.

Jonathan: Well, that is either a small mercy or a desperate failure of politics, whichever way you then look at it. But let's move on to the specifics, what is this new CMA guidance all about?

Bernadine: Well, in many ways it is not really new. It is a bit like rechauffing an old meal but it is never a bad thing to hear. And it basically focuses on three types of anti-competitive conduct - of which you will be well aware Jonathan and people listening to this podcast is - firstly non-poaching agreements, then we have wage fixing agreements as between competitors, and then probably the most problematic and nuanced of all is information sharing between competitors or information disclosure regarding the terms and conditions of employee's contracts.

Jonathan: Yes and we will be coming on to that last one a bit later because that I suspect is the one that is going to cause the most problems in practice. But let's just cover the other two first. Tell me about non-poaching agreements, employees agreeing not to hire each other's staff.

Bernardine: Precisely that. It occurs where two or more businesses agree not to approach or hire each other employees, or not to do so without the other employer's prior consent. And this effectively neutralises what should be a competitive constraint as between those two competitors, and it allows them to neglect improving or maintaining working conditions or other benefits which keep their employees happy, lead to innovation and effectively as between competitors they become rather sclerotic in the market place and a cosy country club evolves.

Jonathan: It is again all about distorting the market isn't it?

Bernardine: Absolutely. Absolutely.

Jonathan: One thing I can tell you as an employment lawyer, is that for many, many years, an agreement between employers not to poaching other's staff has been unenforceable as a matter of law. This is not just saying it is unenforce, we are saying there are possible regulatory consequences.

Bernardine: Absolutely. Absolutely. It is actually a matter of competition law, it is not about agreements as such, it can be handshake, it can be a nod, it can be a wink, it can be a casual phone call, a WhatsApp. You don't have to have someone come back and say "yes I confirm I agree. I am committed". It can be a very, very loose arrangement - what we refer to as a concerted practice, it does not have to elevate itself to a level of an agreement, no matter how informal.

Jonathan: That's interesting. Perhaps let's talk about that in a the context of something which I think anybody could or should as a professional be able to recognise as an anti-competitive practice and that is wage fixing agreements.

Bernardine: Yes. That is much more obvious. It would be a group of people, one or two or a group, agreeing the same rates of pay or setting maximum caps on pay for employees or other conditions of pay, it is not just simply the pay itself, it could be other things that go into terms and conditions that people provide to their staff. And you know, that really is a slam dunk cartel for want of a better word.

Jonathan: Cartel?

Bernardine: Yes, it is an emotive word but these types of arrangements as between competitors are a cartel. Also, something I have heard so often over the years, the fact that the players may be tiny, tiny, tiny in the market is absolutely irrelevant. So, often people say this was a victimless crime, we are already small in the market, we are getting beaten up by all the big players. The way competition law works is to say if something is a serious breach of the competition rules, such as a wage fixing agreement, the law will presume there to be a harmful effect on competition.

Jonathan: So, we have talked about wage fixing, we have talked about non-poaching agreements. Those I suspect are relatively rare, but what about information sharing? What is the problem here?

Bernardine: Yes. I think information sharing, as I nuanced earlier, is probably the most difficult aspect out of all of this for people to get their heads around. So, I think it is easy if I look at it by reference to the basic premise of the competition laws, is that every enterprise should determine their own conduct on the market independently of their competitors. So, in some ways the law says you need to fly blind. Yes, business intelligence may be obtained what is available publicly, what you may be told anecdotally - the usual typical cocktail party conversations as long as you are not having one with a direct competitor of course - but one can overstep the mark if information is disclosed to you or you disclose it somebody else. And the usual test is, is this a commercially sensitive issue? So, generally one does not advertise what one pays to one's staff in the market, simply because it is so sensitive and it goes to your costs of production quite frankly. And so, if you disclose that information or you are involved in that information exchange I have disclosed to you and you do not distance yourself from it, it is extremely problematic from a competition law perspective.

Jonathan: OK now, this is really interesting because every HR manager when they are looking to fill a role and they are looking to see how much it is going to cost, wants to know what is the going rate? How much is this going to cost me in the market and they want to know that preferably before they advertise? Because sometimes they will advertise a range, very often it will advertise a range of salaries although not necessarily the specific that you are going to pay to a particular person or a particular role and of course you can glean information by how much your competitors are advertising because that is public information. But there are lots of other ways that you might be able to get that information. Are we saying that really is a problem?

Bernardine: It can be a problem. And the extent to which it does become a problem does depend upon the structure of the market and what is going on in the market. Because on the one hand, economists will say look the more information out there, the more transparent the market is, the more active , will be the competition and that is a good thing. However, if you have a market where you have a limited number of market players, you have very similar conditions of production, there, an undue level of information and people reaching across the aisle to give each other information that ordinarily would not be out there in the market place becomes very problematic, and in that context it does depend upon the nature of the market. But that says if it is a competitor-to-competitor exchange or disclosure of competitively sensitive information, it is of itself problematic and illegal not just problematic.

Jonathan: And I can see that so one HR manager says to another, this is what we are paying for this, this sort of role, that is going to be a problem straightaway.

Bernardine: Absolutely and casual conversations that can happen. Companies have been fined enormous amounts, millions, for casual conversations. Surprisingly at accountancy dos or training seminars, people are having a water cooler conversation saying how are you viewing things? That is problematic, which is why it is important that HR personnel have good training.

Jonathan: We will come back to that perhaps in a moment. What about things like salary surveys, what about where you have got a third party which is collating information, HR they'll get a website link or whatever it is, how much are you paying for this sort of role what is the range? How much of a problem is that?

Bernardine: I do twitch sometimes around these salary surveys and I am afraid this is a typical competition lawyer's answer Jonathan. It all depends. If you have got a large cohort of market players and there are a number of alternative agents who would do such surveys I think that is much less problematic and probably OK than a situation where you have got very limited players in the market - I don't know -things are as rare as hen's teeth, AI specialists for example, where you have got a very, very limited players in the market limited cohort of would be employees, then I think that could become quite problematic and also if everybody is knowingly going to that one or two agents and necessarily those agents become a conduit for that inappropriate practice.

Jonathan: And is it also true that you determine it by job grade? Let me give an example because everything depends, so let's help with the depends. So, you have got say law firms, maybe 200 commercial law firms, and there are a couple of organisations for their own promotional reasons I think one of the accountants does a survey, one of the recruitment consultants does a survey, so for law firms generally, that is OK?

Bernardine: Yes, because you have got a large number of market players. But even in that though you can have nano-markets within markets. So say there is somebody in a particularly interesting specialist skill and say there are only three law firms that provide that particular skill and there is a single agent who does that survey, then straightway you can say well this and everyone is aware of that, there is a collusive effect here.

Jonathan: So, for example in my scenario if you had something like a director of legal engineering. I am not even sure if such a post exists but I do know that there is this professional legal engineers, which is quite a small number of those 200 law firms I would have thought who employ them, and an even smaller number who have a director function.

Bernardine: Yes, if there is a specific demand for them that cannot be met by other ways you can see very quickly you could have a situation, uncomfortable situation with regards to that information exchange.

Jonathan: Right, well there is a lot of food for thought there as to how HR actually operates. Fortunately, I thought it was fortunate that, there is a lot from the CMA, even in this initiative that it talks about how you can avoid these problems and we are dealing with the first point here which is employers should ensure they understand how competition law applies to no poaching and wage fixing agreements, not to creep with competitors to fix wages, not to poach each other's employees and they should not share sensitive information regarding the business or its employees with a competing business. That much I think should be reasonably obvious, but there are some other practical suggestions that the CMA makes. They should provide staff involved in recruitment with training on competition law and how it applies in a recruitment context.

Bernardine: Absolutely and Jonathan you cannot do it enough. People forget and they need to be constantly reminded. Yes, absolutely have an induction when you have a new member of HR, have an induction training for them, but constantly at least once a year, refresh and remind people and please do not make it legal, make it interesting, make it full of case studies, make it full of anecdotes and steer clear of the law, do it in layman's interesting context. Because so often competition law, people some reason make it deadly, deadly dull. You need to refresh it and make it lively and make it interesting and accessible.

Jonathan: And even if you give them lots of fun, lots of interest, the CMA go on to say that employers should have solid internal reporting processes in place and the staff are aware of the existence of such procedures and how they can use them. So, they must know that if they are approached by somebody else to share information they can report that internally and also frankly report their colleague.

Bernardine: Yes, absolutely. Because it is a very careful balance I think compliance training. What you do not want to do is finger wag at people and then if they happen to engage in an infelicitous conversation they need to have the confidence to know they can come forward on the Monday morning and say "I am so sorry. I had this conversation. I should not have had this conversation. I am telling you about it now" - that they feel they are actually in a safe space at work whereby they can self-report or they can report colleagues who they believe have engaged in something that is inappropriate. That is really important that people feel confident enough to speak up and that illegal practices do not get driven underground.

Jonathan: Yet another sold reason to have a really effective whistleblowing or speak up policy in place. Now, I have also got in my head in relation to competition law, I got this word 'leniency' blowing around, which I dimly remember.

Bernardine: Yes, this is something that competition authorities do. So essentially, if you are the first to go in with evidence of a hard core practice cartel, you will get so called 'amnesty', in other words you will not be fined, and if you are the second to come in or the third to come in, you get a reduction in fines. However, it is a double edged sword, so treat leniency with extreme care. Think very, very carefully in deed before you ever go for leniency and your reasons for doing so because it can bite back at you, because yes fine in theory you get 100% off fines if you are the first to go in, but you have to co-operate with the CMA throughout the investigation, provide your people up for examining, being questioned etc. etc. That could go on for months and you have to admit that you breached the competition rules, that it produces an effect on the market etc. etc. And so there will be a decision issued against you with your company's name on the front and the parent saying you breached the competition rules, you accepted that you did, you confessed up what you did, no fine but a beautiful long decision describing in great detail what you got up to and that can then be taken by law firms and then approached to all your other employere, class action etc. etc. to then found an action for damages which then goes on for another X amount of time. Think of leniency with great caution because there are serious downsides as well as upsides.

Jonathan: Bernardine, thank you so much for joining me on this podcast. I think the message here is clear. The CMA can investigate businesses across all sectors if there are reasonable grounds to suspect any potential infringement. And it is crucial that employers do not indulge in anti-competitive practices when recruiting and retaining talent. If you think you have any issues on this, please do get in touch with Bernie or me and we shall as ever be delighted to help.

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