Introduction to Non-Solicitation Agreements (NSAs)
For years, competition authorities have primarily focused on addressing issues in product markets for consumer goods and access to inputs. However, labor market competition problems have only recently started gaining attention.
Traditionally, competition agencies did not view labor market competition issues as significant because, in theory, any worker could easily switch between numerous employers without major difficulties. Consequently, agreements between companies to refrain from competing for labor were minimized, as there would always be other potential employers.
The Reality of Labor Market Specialization and Mobility Costs
In my opinion, this argument overlooks the reality that labor also specializes and is not perfectly mobile. In fact, there are substantial switching costs. A worker may find it difficult to change jobs due to personal and professional reasons, which are exacerbated when there are few labor offerings in a specific market. On a personal level, a worker’s spouse or children’s occupations may complicate relocation. Professionally, a specialized worker may find it challenging to secure similar employment or salary in other companies, especially since they have invested time and resources in specializing.
Impact of NSAs on Labor Market Segmentation and Stagnant Wages
An agreement between competitors aiming to restrict worker mobility can have a similar effect as a cartel, segmenting the labor market: you keep these employees and I’ll keep the others. Furthermore, wages tend to grow less in these conditions as employers feel less pressure to increase salaries to retain talent when other companies cannot make offers.
Justification for NSAs in Merger Agreements
Nonetheless, these agreements—commonly known as “non-solicitation clauses for employees”—can be justified when strictly necessary to carry out a merger agreement. For instance, a company acquiring another needs the selling company to refrain from offering its employees to return for a certain period. This justification lies in the acquiring company’s investment, partly motivated by acquiring the knowledge of the workforce.
However, excessively limiting worker mobility for extended periods would not be justified. Therefore, such agreements should be evaluated on a case-by-case basis to ensure they do not reduce competition and harm workers, similar to how product and service market competition is analyzed, as stated in Rule 10 of the 2023 Merger Guidelines in the United States.
European Perspective on NSAs
Since 2005, the European authority has mentioned in its guidance on restrictions related to mergers that non-solicitation clauses have comparable effects to those of non-compete clauses in product markets. Therefore, they should be assessed similarly.
Ultimately, non-solicitation agreements are also a form of non-competition in labor markets that can be precisely defined using the same methods as any other market.
Recent Case: Commission Europe Fines Delivery Hero and Glovo
In a recent case, the European Commission fined Delivery Hero and Glovo, two food delivery platforms, €329 million for agreeing to impose four-year non-solicitation clauses on employees. The commission pointed out that such cartels reduce employee alternatives and incentives to compete and innovate.
Key Questions and Answers
- What are non-solicitation agreements (NSAs)? NSAs are clauses in employment contracts that prevent former employees from soliciting their previous company’s clients or employees for a certain period.
- Why are NSAs controversial in labor markets? NSAs can restrict worker mobility, leading to market segmentation and stagnant wages. They may also hinder competition and innovation.
- When are NSAs justified? NSAs can be justified in merger agreements when strictly necessary to protect the acquiring company’s investment, especially when it involves acquiring the knowledge of the workforce.
- How do competition authorities view NSAs? Competition authorities in the US and Europe assess NSAs similarly to non-compete clauses in product markets, ensuring they do not reduce competition or harm workers.
- What was the recent case involving NSAs in Europe? The European Commission fined Delivery Hero and Glovo €329 million for agreeing to impose four-year non-solicitation clauses on employees, reducing competition and innovation incentives.
