Watch out employers: your non-compete and no-poaching agreements may also be considered anti-competitive in South Africa
8 August 2023
by Ryan Goodman, Lameez Mayet and Erykah Rantho
With competition authorities worldwide scrutinising the labour market, non-compete and no-poaching agreements between employers and employees may be regarded as anti-competitive under certain competition laws and regulations. Given the additional public interest and employment focus of the South African Competition Act, 1998 (as amended), the South African competition authorities could soon turn their attention to tackling practices impacting South African labour markets. South African employers should therefore make sure that their labour practices align with competition imperatives.
Non-compete agreements are entered into between an employer and the employee. They prevent employees from competing with their former employer either by accepting employment with the employer’s competitors or by entering into the same or similar business, for a specific period or within a specific geographic area after their employment ends. Traditionally, non-compete agreements may serve a legitimate purpose in protecting the proprietary interests of an employer and may also work to encourage employers to invest in employees.
No-poaching agreements are entered into between two or more employers to prevent an employer from poaching the employees of another employer. The agreements may be entered into with or without the knowledge of affected employees and may entail employers agreeing not to hire the other’s former employees for a set time even after the termination of their employment contract.
The recent approach of foreign competition authorities to non-compete and no-poaching agreements
The first half of 2023 has seen competition authorities across the globe focus their attention on the impact and regulation of labour practices, including not only non-compete and no-poaching agreements but also wage-setting and the sharing of relevant employee/employment information.
In February 2023, the UK’s Competition and Markets Authority (the “CMA”) published guidance to employers highlighting the anti-competitive nature of no-poaching agreements, wage-fixing agreements, and information sharing, which it noted may constitute business cartels. The guidance further included advice for businesses to understand competition law and not to enter into such agreements and to seek leniency from the CMA where such agreements have been concluded.
The law on non-compete clauses in the UK has historically been developed in terms of the common law and the general practice has been to allow the enforcement of non-compete agreements for up to twelve months, depending on what is reasonably necessary to protect the employer’s legitimate business interests. However, in May 2023, the UK Government published a policy paper titled “Smarter Regulation to Grow the Economy”, where it proposed to limit the duration of non-compete clauses in employment contracts to just three months. As we understand it, the UK has adopted this stance on the basis that there are economic benefits to limiting non-compete agreements because their limitation makes it easier for people to start their businesses or find employment elsewhere, which is beneficial for the overall economy and has the potential to drive economic growth through greater competition and innovation.
While in the US, the Federal Trade Commission (“FTC”) and the Department of Justice (“DoJ”) have been tackling the competitive impact of these types of labour practices for over a decade now, in January 2023, the FTC proposed a specific law that would, subject to a few specific exceptions, prohibit firms from requiring their employees to sign non-compete agreements as they constitute unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act (the “FTC Act”). The proposal from the FTC is currently in the process of being reviewed for public comment and a vote on the ban is, as we understand, likely to take place in the first quarter of 2024.
More specifically, it is noteworthy that, as recently as 1 July 2023, the State of Minnesota has implemented legislation prohibiting employers from entering into non-compete agreements with employees or independent contractors and the State of New York has also recently passed a Bill to prohibit non-compete agreements in New York and to allow individuals covered under the Bill to bring a civil action against employers.
An example of how the above approach has been adopted by the FTC is in the matters of O-I Glass and Ardagh Group S.A, Ardagh Glass Inc, and Ardagh Glass Packaging Inc (the “Respondents”), which were decided in February 2023. In these matters, the respondents were manufacturers and sellers of glass containers used for food and beverage packaging and required employees in different positions in the corporation to enter into non-compete agreements to prohibit workers from directly or indirectly being employed by or associating with any business that sells products and services in the USA that are the same or substantially similar to those of the respondents, without the respondents’ prior written consent.
The Respondents’ conduct was described as having the likely effect of harming competition, consumers, and workers in the glass container industry, reducing employee mobility, salaries and wages, benefits, and overall resulting in less favourable conditions for employees. It was alleged that the Respondents’ conduct constituted an unfair method of competition and contravened Section 5 of the FTC Act. As a result, the Respondents entered into consent orders with the FTC in terms of which the Respondents would cancel and release current and former employees in job positions identified in the orders from all non-compete agreements and would stop entering into non-compete agreements with employees in those positions.
With regards to no-poaching agreements, the FTC and DOJ Antitrust Division published their ‘Antitrust Guidance For Human Resource Professionals’ (the “Paper”) in 2016. In the Paper, it was stated that agreements among employers to not recruit certain employees or not to compete on terms of compensation are illegal. The Paper advised HR professionals to avoid entering into agreements concerning terms and conditions with other firms and agreements about fixing employees’ salaries and wages or other terms of compensation with firms that compete for employees. HR professionals entering into such agreements would be found to have contravened anti-trust laws. The conduct was then criminalised in 2018 with the first DOJ case involving no-poach agreements being brought in 2020. Since then, multiple cases have been brought under the Sherman Antitrust Act.
In Canada, the Competition Bureau published its Enforcement Guidelines on wage-fixing and no-poaching agreements at the end of May 2023 (which came into effect on 23 June 2023). Going forward, Canadian law will criminalise reciprocal agreements between unaffiliated employers to fix wages and/or not solicit each other’s employees.
In Peru, the National Institute for the Defence of Free Competition and the Protection of Intellectual Property issued its first-ever no-poach infringement decision in May 2023 against six construction companies for agreeing not to hire their rivals’ workers. The construction companies and their executives were heavily fined for their conduct.
Non-compete and no-poaching agreements in South Africa
In South Africa, there are currently no express provisions in the South African Competition Act which specifically prohibit non-compete and/or no-poaching agreements between employers.
In respect of non-compete agreements the general principle, as developed by the common law, is that a non-compete agreement or restraint of trade is only enforceable if:
- the employer has a legitimate proprietary interest worth protecting;
- the restraint is reasonable with respect to the geographical area and duration; and
- the restraint is clear in its meaning and application. However, there is no set guideline in respect of how long a restraint of trade or non-compete agreement should apply as that can only be determined by considering the particular circumstances of each case.
While historically, non-compete agreements have been viewed to fall within the ambit of labour law, there are definite competition implications of such agreements and they may fall to be considered in terms of relevant competition laws. Specifically, a non-compete agreement may be considered as an agreement to not compete between actual and/or potential competitors (where the employee is prohibited from starting a business in competition with their employer), or as a prohibited vertical arrangement or abuse of dominance (where the employer is dominant) that substantially lessens or prevents competition in the labour market, or forecloses or excludes the employer’s competitors from accessing employees, consequently having a detrimental effect on employees who are seeking employment especially where such an agreement is broad.
No-poaching agreements (or wage-fixing agreements) may be treated as per se contraventions under the cartel-prohibiting provisions of the Competition Act, as employers that compete for the same employees may be considered to be competitors in the job market. For instance, an agreement entered into between employers to fix salaries and wages, benefits, or terms and conditions may be considered to be price fixing in terms of the Competition Act.
A finding that a firm engaged in a prohibited practice in terms of the Competition Act has serious consequences, including the payment of hefty administrative penalties, reputational damage, and, in the case of cartel conduct, potential criminal liability for directors and senior management.
Over and above the competition considerations, the South African Competition Act places a somewhat unique responsibility on the competition authorities to consider the public interest, including the effect on employment, with one of the purposes of the Competition Act being to “promote the employment and advance the social and economic welfare of South Africans”.
As a result, the South African competition authorities are very intentional about ensuring that public interest considerations under the Competition Act, including employment are not detrimentally affected. It is, therefore, possible that the South African competition authorities will follow suit of other global authorities and focus their attention on competition in labour markets, whilst at the same time closely assessing the potential public interest implications of any non-compete and/or no-poaching agreements. For example, the effect of non-compete and/or no-poaching agreements on the opportunity of employees, particularly in relation to historically disadvantaged employees, to obtain employment or better employment or to contribute to the growth of the South African economy by starting their own businesses, will most certainly come into consideration.
What should employers do?
It is important that any business operating in, into or from South Africa is aware of and complies with South Africa’s competition laws. While the competition law focus may traditionally have been on ensuring that engagements and agreements with customers and suppliers are compliant, employees involved in human resources must also be trained in competition laws and employers must ensure that their employment agreements and labour practices continue to keep up with the latest developments from a competition law compliance perspective.
Employers need to ensure that they avoid entering into any anti-competitive no-poaching agreements with any of their actual and/or potential competitors and should seek the advice of their internal legal advisors or external competition law experts to ensure that their existing (or about to be concluded) non-compete agreements with its employees continue to stand or will stand muster from a competition law compliance perspective.
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