The recent indictment of a former manager at an engineering company whose role included procuring nonemployee engineering talent — along with executives at a number of suppliers who were providing skilled professionals to that buyer — serves as a public clarion call for the workforce solutions ecosystem: Clean up or eliminate “no-poaching” clauses in your staffing industry agreements.
The indictment — announced by the US Department of Justice on Dec. 16, 2021, and formally handed down by the US District Court in Connecticut — alleges that the individuals conspired not to hire employees from one another’s companies.
The former manager of the enterprise organization allegedly led the effort as the suppliers’ common customer. The effort allegedly affected thousands of engineers and other skilled workers in the aerospace industry.
And the repercussions can be severe: The maximum penalty for restraining trade is 10 years in prison and a fine of $1 million. The fine can be increased to twice the gain derived from the crime or twice the loss suffered by the victims if either amount is greater than the statutory maximum fine.
Assistant Attorney General Jonathan Kanter of the Department of Justice’s Antitrust Division remarked that the investigation revealed a prolonged and widespread scheme to deprive aerospace workers of the ability to plan their own careers and earn competitive pay.
According to The National Law Review, a no-poaching covenant, in its simplest form, is an agreement, either in writing or orally, between two or more companies not to compete for each other’s employees, such as by not soliciting them during their employment or not hiring them for a period of time after the termination of their employment.
Myths and Realities
Most general no-poach agreements/clauses are in fact illegal. No-poach agreements can create substantial risk for an organization and for individuals that participate in the “restraint of trade” of labor that deprives workers of the ability to compete in the marketplace for opportunities and/or higher wages.
Federal administrations of all political persuasions have issued marketplace guidelines that no-poach agreements are illegal and will be prosecuted. Meanwhile, enforcement of restraint-of-trade regulations by the DOJ has been active across the Obama, Trump and Biden administrations. And, as the former manager under indictment is finding out, the consequences of entering into no-poach agreements can be substantial.
However, not all no-poach agreements are illegal. It actually depends on the nature, purpose and breadth of the no-poach agreement. The DOJ regards no-poach agreements as “naked” — which are illegal — if they are not reasonably necessary to any separate, legitimate business collaboration between the employers. That means, for example, a no-poach agreement may survive in a statement-of-work engagement where strategic personnel are critical in the delivery of a specific purpose or project. It may survive because it is a narrow agreement tied to a specific business collaboration. Naked no-poach agreements are per se unlawful, though, because they eliminate competition in the same way as agreements to fix product prices or allocate customers.
Because the consequences can be severe — and handed down to individual managers as opposed to their employers — the first best practice in addressing no-poach agreement risk is to conduct an immediate review of all agreements and/or clauses limiting solicitation of employment with your organization’s counsel. You may not even be aware such a clause resides in current and/or older staffing agreements that have been in place over long periods of time, especially in the master terms and conditions section of each agreement.
This review effort should discover any existing no-poach agreements/clauses and how these agreements/clauses are used, if ever, in current business relationships with your organization.
Once any such clauses are found, discuss them with counsel to determine what appropriate action is needed to manage and mitigate these growing market risks because whether a federal administration is conservative or liberal, their antitrust divisions intend to investigate and prosecute antitrust labor activity in the marketplace.
Additional risk management and mitigation insight on this and other contingent workforce risk concerns will be discussed with practicing industry attorneys at SIA’s virtual Risk Management and Compliance Workshop April 19-21.