Hospitality + Leisure Trend Watch June 04, 2019

Beware Antitrust Scrutiny of No-Hire and Wage Alignment Agreements

Summary

Did you know that the U.S. antitrust laws prohibit no-hire agreements and wage alignment among hospitality and leisure companies? Entering into such agreements could be a violation of the antitrust laws, with severe punishments and repercussions. The authorities are focused on finding these kinds of violations, with the U.S. Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) (collectively, the Antitrust Authorities) in 2016 issuing “Antitrust Guidance for Human Resources Professional” covering these exact issues. Since then, the Antitrust Authorities have brought enforcement actions against companies found to have entered into such agreements and intervened in several private actions against employers throughout the country.

The Antitrust Authorities are on record as noting, “[We] will enforce the antitrust laws against any companies that agree not to compete for workers, or to attempt to drive down workers’ wages . . . . We will aggressively investigate any other instances in which companies engage in this type of behavior, and we will seek relief commensurate with the conduct, the harm to workers, and — where appropriate — any ill-gotten benefits received by the firms engaged in the illegal activities.”[1]

It may not be obvious but given the way in which the hospitality industry operates, and the collegial discussions that frequently occur on matters relating to hiring and the setting of wages, it is especially important that companies appreciate these risks and avoid these kinds of agreements.

Examples of Improper Actions

The Antitrust Authorities are extremely active in pursuing investigations into no-hire agreements and wage alignment. Below, we explore two recent examples. 

NO HIRE

The DOJ recently challenged an elaborate scheme between two of the largest rail equipment suppliers in the world that prohibited them from competing to hire each other’s employees. In this instance, the DOJ alleged that the parties are each other’s top competitors in certain freight and passenger rail equipment supplies. Thus, as direct competitors, the effects of their improper cooperation in the hiring of employees would be particularly harmful to and result in  limited mobility, information, and bargaining leverage for any individual with an expertise in that industry. In addition, the DOJ investigation found the no-hire agreement to be well-documented in the Defendants’ own documents and detailed it extensively in its  complaint.[2] For example, in a letter from a director of one conspirator to a senior executive at the co-conspirator, the director noted, “[Y]ou and I both agreed that our practice of not targeting each other’s personnel is a prudent cause for both companies. As you so accurately put it, ‘we compete in the market.’” Indeed, the DOJ found that both conspirators informed their outside recruiters to avoid soliciting employees from the other. Other documents suggested that senior hiring officials at one entity would not even consider a candidate from the other entity without the express permission of his counterpart.

It’s worth pausing to explore the status of agreements between franchisees that prohibit or limit soliciting or hiring employees of other franchisees. While the Antitrust Authorities take a view that such franchise-related agreements are entitled to more deference, there are many state attorneys general who have been challenging these agreements and succeeding. Hospitality and leisure companies using franchise models must be aware that such agreements still pose risk. In addition, consider agreements between a hotel operator and a hotel owner that permit the hiring of line employees upon a termination of the management agreement, but limit solicitation of corporate employees or the operator’s key managerial employees at the hotel. These could also be subject to scrutiny because they place a restriction on the free movement of labor.

WAGE ALIGNMENT

The FTC filed a complaint and settlement resolving claims against Texas therapist staffing companies that agreed to reduce pay rates for therapists and invited other competitors to join in the collusive behavior. According to the FTC’s complaint, the companies agreed to lower employee pay rates to the same level and invited several other competitors to do the same. The agreement occurred through agents and via text messages. In one text exchange, after one entity asked whether the other had considered lowering pay rates for physical therapist assistance, the other responded, “Yes I agree[.] I’ll do it with u.”[3] In another message, one competitor wrote, “I agree but we need to get everybody to do it[.]”[4]Shortly thereafter, the competitors invited others to collectively agree to reduce pay rates. This kind of casual discussion among friends exchanging texts led to serious liability for these employees and employers.

Hypothetical Situations Your Employees Could Face

Below are two hypothetical examples your employees could face in the ordinary course of business:

NO HIRE: At an industry conference, two friends who happen to be hotel managers at neighboring, competing hotels are discussing college athletics at their shared alma mater. Seemingly out of nowhere, one hotel manager says to the other, “So we’ve been losing a lot of good people to you and others. It’d be a shame if we got into a bidding war for hotel staff. Let’s call a truce — it’d be better for both of us. What do you say?”

What should be the response? This is a classic invitation not to compete and is not too dissimilar from the real examples discussed above. Here, the other hotel manager should end and discourage any such discussion. While it is certainly acceptable for the hotel managers to be friendly, it is unlawful for the two hotel managers to agree not to compete in the hiring of certain employees.

What if the two friends manage separate franchises of the same hotel brand? Here, the two franchises are still considered competitors and any agreement between the two not to compete in the hiring of certain employees is potentially unlawful.

WAGE ALIGNMENT: In a later conversation at the same industry conference, the two friendly hotel managers are discussing how to interpret recent health code changes. As they are parting ways, one says to the other, “By the way, can you believe how much it costs to hire a good dessert chef these days? I should have gone to culinary arts school! But what if we collectively agreed to cap their wages? Would you be on board with that?”

What should be the response? This, too, is a classic invitation to fix wages. In this case as well, the other hotel manager should end and discourage any such discussion in the future. Just as it would be unlawful for these two to fix nightly hotel rates, it is unlawful to align employees’ wages. 

In both of these instances, the hotel managers should end the discussions immediately and, if required by their respective compliance programs, report the fact that the conversations occurred to the appropriate individual. Importantly, avoiding falling into any antitrust traps in these situations requires at least one of the managers being trained to spot the antitrust issue and stop the conversation before it goes too far. Indeed, the best way to avoid any liability for no-hire or wage alignment agreements is not to enter into them in the first place. As part of annual training, and indeed as part of employee onboarding, we recommend that our hospitality clients include a module on antitrust and competition best practices. Goodwin regularly assists its clients in developing training materials to help their employees identify and defuse these types of situations.


[3] Complaint, In the Matter of Your Therapy Source, LLC, available at https://www.ftc.gov/system/files/documents/cases/1710134_your_therapy_source_complaint_7-31-18.pdf.

[4]Id.