Competition in labour markets takes centre stage in UK, EU and USA

Increasingly competition law regulators are focussing on employment practices that can have significant anti-competitive impact in various industries, whether these are wage fixing agreements, non-competes or non-poaching agreements, with equally a recognition for the need to allow for legitimate collective bargaining agreements, in certain circumstances.

In order to better understand the potential impact that employment practices can have on competitive dynamics in different industries the UK Competition and Markets Authority (CMA) published its first major research report by its new Microeconomics Unit: Competition and market power in UK labour markets (the Report) on 25 January 2024. The Report follows a year in which the CMA demonstrated that competition in labour markets is now an enforcement priority in the UK. Historically competition authorities have focused on product markets, but we have seen competition authorities globally start to focus on other aspects of competition including labour market practices. The CMA’s Report serves as another reminder for businesses to bear in mind competition risks in relation to their activities in labour markets.

The CMA’s Report is intended to be used as evidence to support policymaking and further research into competition and labour markets. The Report found that labour markets are more concentrated outside of London and the Southeast and where markets are more concentrated there is a real cost for workers. For example, on average wages are 10% lower in the most concentrated markets compared to the least concentrated. The Report notes that collective bargaining is effective to counteract the negative effect on wages of market power in industries which are concentrated.

The Report also found that non-compete clauses are prevalent across the UK economy impacting around 30% of workers. This rises to over 40% in ICT and professional and scientific services. The CMA said there is a clear concern that UK firms are using employment clauses such as non-competes to restrict worker mobility. In Sarah Cardell’s (Chief Executive of the Competition and Markets Authority) speech on the report she suggested the law on non-compete clauses may be in need of updating.

The UK Government has already proposed to introduce a three-month limit to non-competes in contracts of employment and the contracts of certain other workers who benefit from certain protections under UK employment law. However, it is unlikely that there will be any change in the law prior to the next general election as it was not included in the King’s speech in November 2023. It is therefore unclear if or when such a change in the law may be made. This follows a similar US proposal which would ban all non-compete clauses in employment contracts. Again it is unclear if and when the US will change the law on non-competes, although there are already significant restrictions in a number of states.

The Report offers a further example of the CMA’s commitment to enforcing competition law in labour markets. It follows labour markets being called out as an area of focus in the CMA’s Annual Plan for 2023 – 2024 and the advice published by the CMA for employers last year on how to avoid competition breaches. The advice focused on three labour market distortions: wage fixing, no poaching and information sharing.

The CMA has already demonstrated its willingness to enforce competition law in labour markets by opening a number of investigations into potentially anticompetitive labour market practices last year.

In October 2023 the CMA opened an investigation into the purchase of freelance services and the employment of staff in the UK media industry regarding all content other than sport, with a similar case involving sports content having been opened in July 2022. These investigations appear to focus on agreements and/or information sharing between competing producers to fix the rates offered to staff and freelancers, although it is an industry where there are also recommended minimum rates published by industry associations such as PACT and BECTU. Fixing the rates or other benefits offering to staff is anticompetitive in the UK as rates need to either be independently negotiated or set through some form of collective bargaining, as made clear by the CMA when it fined numerous agencies for looking to collectively improve rates and conditions for photo models.

Conscious of the need for some clear guidance as to when collective bargaining may be permissible, and with an increased recognition that this has extended beyond the traditional sphere of employees (where agreements between employers and workers are not subject to EU competition rules) to also self-employed workers in the digital economy looking to collective improve their working conditions (where as these are considered individual undertakings competition law does apply), the EU Commission published last some guidance (Guidelines on Collective Agreements by solo self-employed people, Sept 2022). Other regulators such as the CMA are also considering whether they need to provide further guidance in this area.

In January 2024 the CMA announced a new line of inquiry in the ongoing cartel proceedings in the fragrance industry involving reciprocal arrangements relating to the hiring or recruitment of certain staff involved in the supply of fragrances and/or fragrance ingredients (i.e. non-poaching agreements). It is interesting to note that potential anticompetitive conduct in labour markets is being picked up in cartel investigations opened to address other issues and then investigated.

The CMA is not alone in focusing on labour market competition law violations. There is a global trend of competition authorities looking at such matters. In Europe there have been a number of investigations by national competition authorities into anticompetitive conduct in labour markets. For example, in Hungary the competition authority imposed a £2.3 million fine for a variety of conduct including fixing minimum fees and other conditions in respect to labour-hire and recruitment services by its members, the use of no-poaching clauses to prevent free movement of employees and limits placed on members’ ability to submit tenders using data and CVs of employees working for another company in public procurement procedures. At a Europe-wide level the European Commission in 2023 announced the first ever dawn raids carried out in relation to a suspected no-poach agreement (and associated anti-competitive exchange of information) in the online food delivery sector.

The US has been taking a stricter approach to competition enforcement in labour markets for a while. The U.S. Department of Justice recently conducted a number of criminal prosecutions against employers who allegedly either agreed with one another to fix employee wages or not to “poach” each other’s employees. Some of these prosecutions have failed (primarily because of insufficient evidence of an agreement) but the legal theory has been validated. There has also been a number of civil class actions by categories of employees against employers who have successfully recovered treble damages from alleged wage-fixers (e.g. in a claim brought by nurses) or settled actions for a large payout (e.g. against Disney by animators).

Further competition law enforcement in labour markets seems increasingly likely given a recognisable trend of competition authorities focussing on these issues around the world. It is therefore very important for all business irrespective of the industry you compete in to ensure HR departments are fully familiar with competition law compliance and training programmes, and that care is taken to avoid potentially infringing conduct in this context.