On January 18, the Competition Bureau announced a consultation process and released its promised draft enforcement guidance for the pending criminal prohibition on wage-fixing and no-poach agreements introduced in the June 2022 amendments to the Competition Act (the Act).
The deadline for submitting comments on the draft guidelines online or to the Bureau’s Cartels Directorate directly is March 3, 2023.
In June 2022, the Government of Canada introduced a number amendments to the Act, including a new provision that will criminalize agreements between unrelated businesses to fix employee wages or restrict employee job mobility.
The intended purpose of the new law is to bring Canada’s approach to wage-fixing and no-poach agreements in line with other jurisdictions such as the US, where these types of agreements are already criminalized.
The new criminal offence will come into force on June 23, 2023. For more information about the other changes to the Act (which are already in force), please see our earlier updates.
Wage-fixing and no-poach agreements: A new criminal offence
The new Section 45(1.1) of the Act will criminalize agreements or arrangements between unaffiliated employers:
- to fix, maintain, decrease or control salaries, wages or terms and conditions of employment (“wage-fixing” agreements); or
- to not solicit or hire each other’s employees (“no-poach” or “no-hire” agreements).
Employers who participate in illegal wage-fixing or no-poach agreements face significant criminal penalties, including imprisonment of up to 14 years or a fine at the discretion of the court, or both. They also face potential civil liability for damages.
Draft enforcement guidance
The draft guidance describes the approach the Bureau will take in interpreting and enforcing the new prohibition on wage-fixing and no-poach agreements. While Bureau guidelines are not legally binding, given the broad – and untested – scope of the new offence, the guidelines will be an important tool for employers and their counsel to assess risk when drafting and negotiating these types of clauses.
The draft guidance provides insight on the Bureau’s enforcement approach across a range different scenarios, including:
- Will independent contractors be caught by the scope of the new offence? No. The draft guidelines suggest that an employer-employee relationship must exist to engage the new offence. Although not explicitly stated, this suggests that agreements relating to the terms of independent contractor agreements will not be subject to criminal enforcement action.
- What does it mean to fix “terms and conditions of employment”? Subsection 45(1.1)(a) prohibits not only agreements that fix employee salaries and wages, but those that fix the “terms and conditions of employment.” The draft guidelines define this broadly to mean “the responsibilities, benefits and policies associated with a job” such as job descriptions, allowances and reimbursements, non-monetary compensation, working hours, location and directives (including non-compete clauses) that may restrict an individual’s job opportunities.
- Only reciprocal no-poach agreements will be criminalized. The draft guidelines clarify that no-poach agreements are only illegal where two or more employers agree not to solicit or hire “each other’s” employees. Situations where only one party has agreed not to poach another party’s employee (and there is no reciprocal agreement to not poach the first party’s employees) will not be caught by the new criminal provision. While this provides comfort in some cases, the reality is many no-poach agreements are legitimately reciprocal (for example, in joint venture or other collaboration agreements).
- How will the Bureau apply the ancillary restraints defence? The ancillary restraints defence is available where the parties can demonstrate that an otherwise illegal agreement is ancillary to a broader agreement between the same parties and is “directly related and reasonably necessary” to achieve the objective of that broader agreement. According to the draft guidance, the Bureau will generally not challenge wage-fixing or no-poach clauses in merger agreements, joint ventures or strategic alliances under the new criminal provision except where the clauses are clearly broader than necessary in terms of covered employees, territories or duration, or where the merger, joint venture or strategic alliance is a sham.1 Again, while this is helpful, the Bureau is reserving broad discretion to second-guess and potentially take criminal enforcement action in circumstances where the parties had no intent to act unlawfully.
- How will no-poach clauses in franchise agreements be treated? The Bureau will generally treat no-poach clauses in franchise agreements as prohibited under the new offence, unless the parties can demonstrate the no-poach clause is related and necessary to the broader franchise agreement. Franchisors and franchisees should carefully review their contracts and related employment practices in light of this guidance.
Though their final form may change following the comment period, the draft guidelines nevertheless provide some insight into the Bureau’s contemplated enforcement approach to the wage-fixing and no-poach agreements.
Unfortunately, the draft guidelines allow the Bureau broad enforcement discretion and are unclear as to the treatment of legitimate agreements between employers that were entered into before the new law comes into force. Given the potential significance of this issue, the Bureau should provide sufficient clarity to businesses on the treatment of existing agreements under the new provisions. In the interim, companies with existing agreements that include the types of provisions caught by the new law need to consider what steps may need to be taken to manage potential compliance issues.
This is made especially challenging by the fact a company cannot unilaterally amend a contract and attempting to renegotiate contracts to address one provision can be used by a counterparty as a reason to negotiate unrelated terms. However, this concern may be mitigated in most cases as the compliance issue applies equally to all parties to a potentially problematic wage-fixing or no-poach agreement.
The draft guidelines also serve as an important notice to the business community that, going forward, even legitimate wage-fixing and no-poach clauses and arrangements in commercial agreements must be carefully drafted to ensure they comply with the new provision and are viewed as a necessary part of an otherwise legitimate larger agreement to shelter under the ancillary restraints defence. Clauses or agreements that are overly broad (in terms of duration, subject matter, geographic scope, etc.) or are not needed to achieve the aims of the broader agreement between the parties may not be covered by this defence.
Norton Rose Fulbright will continue to monitor the consultation process and the likely timing for release of the final enforcement guidance. While the draft guidance suggests the Bureau will take a measured approach in this area, it is important for companies to review their agreements and practices to ensure they address any potential compliance issues before the new provision enters into force on June 23, 2023.