Why Australia should look to Canada on no-poach agreements and wage fixing

When Andrew Leigh floated the idea of banning no-poach agreements and noncompete clauses earlier this month, some observers assumed Australia’s assistant minister for competition was merely indulging in an act of policy kite-flying.

After all, employment arrangements had been specifically carved out of competition law in 1974 — almost 50 years ago — by the short-lived government of the union-affiliated Australian Labor Party. Why would a center-left minister in 2023 want to mess with that legacy?

Yet more hard-nosed competition practitioners were worried, saying that Leigh’s speech on restrictive employment practices wasn’t a thought-bubble. In fact, they say they’re already gearing up to advise their clients on how best to manage the changes that are now on the horizon.

The regulatory risk, they say, is clear. If the government were to do away with Section 51(2) of the Competition and Consumer Act, which excludes “conditions of employment,” then contracts would need redrafting and companies’ communications with rivals over hiring practices would need to be shut down.

The first reason why observers are taking Leigh seriously is that they believe a junior minister wouldn’t direct the Australian Competition & Consumer Commission, or ACCC, and the Australian Treasury to examine the economic cost of employment practices without the full support of the government.

Then there’s the international backdrop to the speech, which is also feeding into the belief that the days are numbered for the competition law’s employment carve-out.

Oddly, it’s not so much the United States’ vigorous antitrust pursuit of no-poach agreements that’s causing concern. Local competition lawyers have traditionally viewed that as the expression of a political culture more focused on individual rights than Australia's ever will be.

As for the US’s obsession with noncompete clauses in employment contracts, which are widely used by Australian law firms to lock in their senior partners, they’re seen in the same light.

But recent developments in Canada, a jurisdiction that presents several institutional parallels with Australia, appear harder to dismiss.

As is the case in Australia, Canadian employment arrangements hadn’t come under competition law — albeit as a result of judicial interpretation, rather than a specific carve-out comparable to Australia’s Section 51(2).

Yet that will change on June 23 this year when Canada’s revised competition legislation comes into effect. From that date, employers colluding on how they pay their employees — and whether to employ them at all — could face criminal charges. If prosecuted and found guilty, they would face jail sentences of up to 14 years and fines left entirely to the judge’s discretion.

The Canadian revamp, and the speed at which it came about, is a wake-up call for Australian competition practitioners. That’s not to say that any of them will enjoy having to expand their practice to include employment agreements — the overwhelming sentiment is that this is the solution to a problem that Australia doesn’t have. Yet most of them are preparing for the change.

Hero pay cut

The Covid-19 pandemic brought the issue of employment collusion to center stage in Canada.

During the pandemic, some grocery chains in the country offered their frontline workers an extra C$2 ($1.46 today) an hour — referred to as “hero pay.” Then the chains agreed among themselves to remove that additional allowance. They consulted with one another and cut the hero pay simultaneously.

At the same time, Canadians were reeling from a price-fixing cartel that had affected the most basic of consumer products: bread. Canada’s Competition Bureau found evidence of a 14-year conspiracy to fix prices of bread that involved some of the country’s largest grocery retailers, including immunity applicant Loblaw.

“A lot of people said: ‘Wait a minute — if grocery chains aren’t allowed to fix bread prices, how can they fix wages?’” says competition lawyer Kenneth Jull, a partner with Toronto-based law firm Gardiner Roberts.

This realization made wage-fixing and no-poach agreements a political issue — one that the government was keen to see resolved. But Canadian judges ruling on a wage-fixing case in sport reminded the country that there could be no easy fix. If Ottawa wanted to do away with employment collusion such as no-poach agreements and wage-fixing, it would have to legislate and expand the Competition Act.

Those changes happened fast — too fast, in the view of many. There was little debate in parliament and the changes to competition law were tagged on to a budget-amendment bill. Yet the changes that went through were radical — collusion among employers wasn’t just banned, it was criminalized.

As of June, even agreements to “not solicit or hire each other’s employees” will be dealt with through the Competition Act. And the wording of the amendments means that employers agreeing not to poach each other’s staff or colluding on wages don’t even have to be in competition with one another to be prosecuted.

In short: The changes are extremely broad. What’s more, they’re likely to apply to franchises, something that, if transposed to Australia, would wreak havoc on the contracts signed by franchisees, which routinely contain no-poach agreements relating to the staff of other franchisees.

In Canada, as is the case in Australia, it will be hard to determine how much of an impact these types of laws will have because the degree to which employers collude on wages and hiring remains largely unknown — for example, in Australia there is no requirement that franchise contracts be made public.

But in an interview with MLex, lawyer Kenneth Jull said that his advice to clients would be to forget about finding legal ways to prevent their staff being poached and start focusing on how they can make their employees stay.

“From a justice point of view, these are good amendments,” says Jull, who worked at the Competition Bureau between 2016 and 2018. “It makes you step up your game. And that’s a good thing.”

Flip burgers, don’t move

In Australia, employment-based competition issues such as wage-fixing, no-poach agreements and contractual noncompete arrangements designed to limit labor mobility have yet to resonate with the public. However, that doesn’t mean they shouldn’t be discussed, Leigh argues.

In his recent speech, the minister claimed that no-poach agreements and noncompete clauses were hampering job mobility. As a result, wages were also being kept down, given that an employee’s best way of getting a pay rise was to change jobs.

But lest his audience think that labor mobility was all about high-paid engineers trying to spark a bidding war for their services, Leigh made a point of singling out franchises, using research he carried out several years ago, while still in opposition.

According to Leigh, an economist by trade, Australian-based franchisors including McDonald’s, Baker’s Delight and Domino’s all required their franchisees to sign no-poach agreements. That means that a McDonald’s restaurant in one suburb can’t employ staff from the McDonald’s in the next suburb.

As a result, a capable employee who may want to move from one franchisee to the other — whether to be closer to home or to get a pay rise — is simply precluded from doing so. The only hope is to jump ship entirely and move to, say, the local KFC.

This is the part of the speech that bristled the most with Australian lawyers that have worked on franchise contracts. They say the no-poach agreements are designed to stimulate investment in training — so that one franchisee can’t simply recruit staff trained elsewhere at another franchisee’s expense.

Besides, they argue, competition in these industries should be viewed as competition between one franchise and another — say, McDonald’s and KFC. Franchisees aren’t required to compete with one another on prices, which are set centrally; why should they have to compete on staff?

But Leigh appears determined to follow the course set by the US on both no-poach agreements and noncompete clauses. He even found time to quote US Federal Trade Commission Chair Lina Khan: “The freedom to change jobs is the core to economic liberty and to a competitive, thriving economy.”

Whether Australian competition officials will share that enthusiasm remains to be seen. Speaking to MLex recently, ACCC Chair Gina Cass-Gottlieb appeared cautious about what any future investigation may reveal.

Rugby rules

Australia’s brief experiment to unshackle employees from noncompete, wage-fixing and no-poach agreements goes back to Dec. 13, 1971. That’s when the country’s top court ruled, of all things, in the case of a Rugby League player by the name of Dennis Tutty.

The High Court of Australia upheld Tutty’s attempt to prevent him from signing up to a rival team that was offering him better money. The club’s restraints, the court ruled, were “plainly a fetter on the right of a player to seek and engage in employment.”

Then, in 1974, the Labor Party government introduced the carve-out in the competition law that existed at the time: the Trades Practices Act.

Why the labor exemptions were introduced is unclear and the country’s peak union body, the Australian Council of Trade Unions, declined MLex’s request for comment. But both labor and competition lawyers have suggested that the union movement is cautious about any moves against wage fixing — despite the fact that exemptions for collective bargaining would offer legal protection.

Others question whether legislative changes are needed.

As things stand, not all employment markets are covered by the Competition and Consumer Act carve-out. Independent labor contractors are already subject to the legislation, meaning that labor-hire companies that collude on wages could already face legal action.

As for noncompete clauses in employees’ contracts, lawyers point out that courts are only likely to enforce them if they’re limited in scope. For example, noncompetes covering all of Australia and establishing a timeframe of over three months would always be rejected. Courts would also be unlikely to accept noncompetes for jobs that don’t involve contact with customers.

But Leigh says that whether or not noncompete clauses are enforced, they are still bad for labor mobility. Pointing to research from California, the US state where noncompete clauses aren’t enforced, the Australian minister says there’s still evidence that the contractual arrangements have an effect.

The reason for this is that an employee may not have the expertise to know that the noncompete isn’t enforceable. Others may understand that, but still be reluctant to face legal action by their employers, even if they are ultimately likely to win.

Some lawyers who read Leigh’s speech are dismissive of his research. Nonetheless, with Leigh directing both the ACCC and Treasury to provide more local evidence to push through the changes, the quality of the data may not be a problem for much longer.