Staffing, recruitment, MSP and RPO arrangements | Increased risk of major fines for competition and anti-trust law breaches
Published on 23rd Jul 2018
There have been a number of important developments recently in competition (or "anti-trust") law in the UK and rest of the EU, which increase the risk of serious fines relating to staffing, recruitment, MSP and RPO arrangements.
Why does this matter?
Many larger staffing and recruitment companies spend a great deal of time seeking to ensure they are compliant with this area, for good reason.
This area of law matters because the penalties for breach can be huge (up to 10% of worldwide turnover), and some activities are regarded as criminal offences.
Even if a company does not get caught, unwitting involvement in this sort of thing can seriously affect company value. Getting things wrong in this area will be revealed in due diligence by investors and could make a company potentially unsaleable, so will be of particular concern to owners looking at exiting or obtaining external investment at any future stage.
And the reputational damage can be enormous if clients discover that suppliers have been involved in arrangements which push up the cost of hiring employees/contingent workers.
What are the typical problem areas for staffing and recruitment companies (and MSPs and RPO companies)?
- Non-poaching agreements between competitors.
- Non poaching arrangements in a supply chain where one staffing/recruitment company supplies into another under MSP/RPO arrangements.
- Restrictions (such as financial penalties) on temp-to-perm (T2P) and temp-to-temp (T2T), and forced migration on termination.
- Concerted practices between recruitment and staffing companies in terms of pricing/terms of business, including when faced with unattractive framework terms issued by an RPO or MSP company.
These sorts of arrangement have been scrutinized in the UK and several other EU Member States in the past. And recent legislation will likely lead to an increase in private enforcement and provide additional incentives for compliance.
How has UK/EU competition law affected staffing, recruitment, and MSP/RPO arrangements in the past?
People are the most important asset of just about any business. Modern economies thrive on innovation, creativity and know-how, so the individuals who drive the change are often the key to success. As a result, attempts to limit competition for human capital have on several occasions been considered violations of EU antitrust law.
Fines have been imposed on recruitment and staffing service providers in several EU jurisdictions. Notable examples include the following:
- The French Competition Authority imposed fines totalling USD 121 million on major staffing companies, including two of the largest staffing companies in the world, for having engaged in concerted practices in 2003 and 2004.
- The UK's Office of Fair Trading – predecessor to the Competition and Markets Authority (CMA) – fined six recruitment firms for agreeing fee rates for supplying candidates in the construction industry and for boycotting another rival (MSP operator) from 2004 to 2006. The investigation was triggered by leniency applications, which resulted in immunity for the whistleblower. On appeal, the largest staffing company involved saw its fine reduced from GBP 30.4 million to 5.9 million. That company highlighted that one single staff member had entangled the recruitment company in the anti-competitive practices. US-based cartelist CDI saw its fine cut back from GBP 7.6 million to 1.54 million. One of the court’s reasons for the reductions was a lack of market effect (though it is worth noting that it suffices for the imposition of a fine in the EU that the mere object of an agreement or concerted practice was to restrict competition). CDI's involvement was via a UK subsidiary it had recently bought, whose local management had got involved in the arrangement, unbeknownst to its US head office.
How does the law now affect restrictions on hiring/non-poaching/T2T and T2P?
EU antitrust law does not just protect competition on product markets; it requires competitors to refrain from restricting competition in personnel markets also. In other words, the war for talent is to be fought fair and freely.
Non-poaching agreements, and agreements in which hiring is deterred by imposition of penalties for T2T/T2P etc., fall within the ambit of EU antitrust law, but can be justified in limited circumstances. Certain types of co-operation result in overall efficiency gains that may necessitate some competitive restraints. The formation of a joint venture, joint research and development or a distribution agreement may require a degree of trust that could not be achieved without a limited non-poaching agreement between the parties.
Similarly, the buyer of a target company may have a legitimate interest in protecting its investment against attempts of the seller to recruit back the key leaders of the target business.
While there is little European case law on this issue, one key question is whether the non-poaching agreement is sufficiently tailored (i.e. limited in time and scope) and merely an ancillary restraint necessary to achieve an overall gain.
- The German Supreme Court was able to sidestep the question of whether non-poaching agreements violate antitrust law in 2014, relying instead on section 75f of the German Commercial Code, which states that non-poaching agreements are generally unenforceable. The Supreme Court accepted that exceptions might apply where companies have a legitimate interest in protecting themselves against unfair exploitation, i.e. in the context of a legitimate co-operation. In that context, the court limited the term of the legitimate non-poaching agreement to two years after the end of the co-operation, stating that any longer period was disproportionate.
- In the same German litigation, the Hamburg Court of Appeals had stated that the covenant not to hire from a competitor did not violate antitrust law as it did not appreciably affect competition. However, this rationale is unlikely to apply in markets for highly specialised workers (such as IT programmers), or for large corporations hiring in substantial numbers, and major MSP and RPO arrangements may be affected. Even smaller companies without significant market share should tread carefully, as in recent years European enforcers have focused on “by object” infringements that represent a violation of antitrust law without regard to effect or market share. If classified as market sharing agreements, non-poaching covenants would fall in this category.
- The antitrust agency in Croatia objected to non-poaching agreements used by a leading IT services provider in agreements with its customers. These customers were required to neither hire from the market leader, nor instruct competing service providers that had recruited from it. Even though the clauses were part of bilateral agreeements, the enforcing authority classified the infringement as a (unilateral) abuse of dominance, highlighting that the use of these provisions by the dominant service provider hindered potential market entries.This sort of decision may impact the operation of some types of agreements in which hiring is deterred by imposition of penalties for T2T/T2P etc..
- The Turkish competition authority considered an agreement between private schools to refrain from hiring each other’s teachers anti-competitive in 2011.
What about US anti-trust rules in this area?
A catalyst for this recent activity in Europe seems to have been the US Department of Justice (DOJ) which, in October 2016, announced that it would be treating no-poach and wage-fixing agreements as criminal antitrust violations punishable by up to $100 million in fines and prison terms of up to 10 years.
Accordingly, these issues are equally applicable to the US. Indeed, the risks associated with this behaviour are even greater if there is a US connection to the allegedly anti-competitive agreement.
What should you do?
Clearly, it is lawful for recruitment and staffing companies to charge reasonable introduction fees to compensate them for the effort they have put into finding a candidate to fill a position.
However staffing and recruitment companies, and operators of RPO and MSP arrangements, will need to take particular care about anything which goes beyond this, and should take advice about what restrictions they can and cannot impose on other staffing and recruitment companies in relation to T2T, T2P, migration and general poaching.
Another area in which this can be an issue is collaboration agreements between competitors where they share clients (perhaps because they do not "do" one skills set or geographical region). Again, care will need to be taken about non-poach restrictions.
Companies also, of course, need to continue to be careful about how they deal with information they may receive (perhaps via an MSP or RPO arrangements) about the prices at which, or terms on which, competitors are prepared to do business.
Similarly, competing businesses (for example in an RPO/MSP situation) should take care when exchanging information about the salaries that they are setting for their staff/contract workers – again, advice will need to be taken and it may be that this sort of intelligence needs to be gathered and benchmarked by an independent third party source and disseminated on an aggregated and anonymised basis.
And of course, it can be very hard to stop ambitious recruitment consultants from having conversations with their peers at other staffing and recruitment companies about pricing etc. To minimise the risk that such conversations may lead to significant fines for you, make sure you have clear policies about that sort of thing, and regular training of recruitment consultants about what they can and cannot do in this area.