India Inc’s new-found liking for no-poach agreements could invite CCI’s attention

India’s increasing pace of economic growth is fuelling a war for talent across a range of industries — from IT and ITES, from banking to finance, and from e-commerce to online gaming. The demand and supply mismatch for talent offers an opportunity for employees to seek higher wages by switching jobs. Naturally, employers aren’t very enthusiastic about paying higher wages or losing valued employees to rivals.

A seemingly innocuous solution has caught their fancy. Employee no-poach pacts, both formal or informal, are finding many takers these days. Some employers are instructing their legal teams to enforce the often ignored ‘non-compete’ clauses in employment contracts. Others are exploring pacts with their competitors to impose salary caps.

Wage cartels

Reportedly, reports some of the leading Indian private sector banks have reached an informal pact to not poach employees from each other to stem attrition at the junior level. In April 2022, the Government of India issued a notice to Infosys on the enforcement of non-compete clauses in employee contracts restraining them from joining competitor firms within six months of quitting Infosys. More recently, leading esports firms have been contemplating an informal pact capping players’ salaries to stem poaching.

Each of these attempts by employers to restrain their employees from seeking greener pastures are welfare-reducing. They artificially depress wages. But for the no-poach pacts or agreements capping salaries, wages would reflect the interaction between demand and supply in the marketplace for talent. These types of agreements or arrangements — formal or informal — have little to no redeeming virtues. They are likely to be viewed as a cartel to fix wages.

The Indian competition regulator - the Competition Commission of India’s (CCI) cartel enforcement track record is pretty robust but it is yet to initiate an inquiry for cartels in the job (labour) market. Is this likely to change?

Globally, competition regulators are showing a renewed interest in employee no-poach, and non-compete agreements. Notable competition/antitrust authorities such as the Federal Trade Commission and Department of Justice (DoJ) of the United States, the Competition and Markets Authority of the United Kingdom, and the European Commission are actively conducting investigations into potential labour market cartels.

For example, US President Biden expressed his intention to focus on competition in labour markets, among others, through an executive order in July 2021. Not surprisingly, the antitrust division of the DoJ has led criminal indictments in a series of cases of anti-competitive no-poach agreements in the labour market.

Across Asia, antitrust/competition authorities in Hong Kong, Japan, and China have demonstrated a clear interest in labour markets, preceding the emergence of the current global trend. While the Competition Commission of India (CCI) has not yet initiated any actions, it closely monitors emerging trends. As the war for talent heats up in India, so will the lure among employers competing for talent to find ways to reduce attrition, while keeping wages low. Doing so though would not be risk-free.

Conduct to avoid

The renewed interest among antitrust regulators towards competition issues in labour markets requires that hiring managers and head-hunters must tread carefully. A wink and a nod are sufficient to prove a cartel. Once the CCI establishes the existence of an agreement to collude, it would be near impossible to show that the cartel had any redeeming virtues. Staying out of no-poach, or similar pacts is indeed the best course of action.

Also, sharing commercially sensitive data regarding wages, bonuses, and employment contract terms among companies could potentially spark worries about wage fixing. This exchange of information might lead competitors or employers to reach a mutual understanding regarding their market behaviour and invite the CCI’s scrutiny.

Win-win solution

No-poach agreements or agreements to cap salaries leave everyone worse off. While the employees suffer, the employer is also left to contend with the risk of antitrust scrutiny and potentially debilitating penalties, which can now extend up to the higher of 10 per cent of their total turnover or three times their entire profit for the duration of the cartel.

Several companies have led the way in devising perfectly legal and win-win solutions for all stakeholders. Their focus on offering internal career opportunities, investment in upskilling their employees, promotions, festival bonuses, quarterly incentives, and ESOP plans are all aimed at stemming the flow of talent to their competitors. These measures may increase the total spend on employees but will help save crores of rupees in a penalty from the CCI.

(Rahul Rai is Partner, and Anicham Tamilmani is Associate, Axiom5 Law Chambers)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.