The U.S. Department of Justice (DOJ), Federal Trade Commission (FTC), and now state attorneys general, have set their sights on staffing companies in their evolving efforts to examine labor markets through an antitrust lens. In recent years, government agencies have stepped up efforts targeting perceived restraints on competition in the labor markets. To date, the primary focus has been on wage-fixing agreements, in which competitors agree on the wages they will set for their workers, and “no-poach” agreements, in which competitors agree not to hire each other’s employees. Recent enforcement activity raises the potential for commonplace and normally lawful practices in the staffing industry – such as non-circumvention clauses and provisions otherwise restricting the direct hire of contingent workers – to be interpreted as unlawful restraints on competition.

Background

At the federal level, claims of anticompetitive conduct in the labor markets have been made under the Sherman Antitrust Act and, to a lesser extent, the Federal Trade Commission Act (FTC Act). Section 1 of the Sherman Act prohibits every “combination” or contract that results in an unreasonable restraint of trade. Certain conduct is deemed illegal per se without inquiry into its competitive effects. Examples of such conduct include price-fixing agreements, bid rigging, or market or customer allocation agreements between competitors. For less-direct restraints, courts use the rule of reason, whereby the alleged anticompetitive effect in the relevant market is weighed against any competitive justifications for that restraint. Under this rule, if the competitive effects of a practice outweigh its anticompetitive harm, the practice is deemed not to be an antitrust violation.

The Sherman Act creates a private right of action and can be brought by individuals. Many states also have their own antitrust laws modeled on the Sherman Act. These state statutes are enforced largely by state attorneys general or private plaintiffs. Section 5 of the FTC Act prohibits “unfair and deceptive acts or practices” and “unfair methods of competition.” The FTC has exclusive authority to bring an action for violation of the FTC Act.

Recent Federal Developments

In October 2016, the DOJ and FTC published their Antitrust Guidance for Human Resource Professionals, which stated that an agreement between competing employers will violate the antitrust laws if it “constrains individual firm decisionmaking” with regards to wages, salaries, benefits, other terms of employment, or job opportunities. The Guidance outlined the scenarios in which the DOJ would bring criminal prosecutions (per se violations), and where the DOJ or FTC might instead bring civil enforcement actions. The Guidance observed that an anticompetitive agreement between competitors could be brokered though “a third-party beneficiary.” It noted that the DOJ had obtained two consent judgments against a healthcare industry association, and that the FTC had obtained against a fashion industry association respectively, all for serving in this type of collusive role.

Over the next four years, the DOJ continued to successfully pursue alleged wage-fixing and no-poach schemes through civil enforcement means, but skepticism remained regarding whether any criminal charges would be brought. Then, in 2020, the DOJ brought its first criminal wage-fixing case in the Eastern District of Texas against the previous owner of a physical therapy staffing company. The DOJ alleged that the owner engaged in a per se unlawful wage-fixing conspiracy to lower the pay rates of physical therapists and their assistants. The owner was found not guilty as to the antitrust charges, but was convicted of obstruction of the government’s investigation into the alleged misconduct. Since then, the DOJ has failed to secure a jury conviction on any of the no-poach or wage-fixing criminal charges that have made it to trial.

Despite this string of losses, the DOJ has expressed an ongoing commitment to bringing criminal no-poach and wage-fixing charges and claimed they remain top priority. On April 13, 2020, the FTC and DOJ released joint guidance on the investigation and prosecution of wage-fixing and other anticompetitive agreements between employers, staffing agencies, and recruiters in the wake of the COVID-19 pandemic. In March 2022, the DOJ’s Antitrust Division and the US Department of Labor (DOL) entered a memorandum of understanding on interagency cooperation, with the stated aim of “protecting workers . . . at risk of being harmed as a result of anticompetitive conduct, including through collusive behavior and the use of business models designed to evade legal accountability.”

Recent State Developments

As with many enforcement trends, states have joined the DOJ and FTC in pursuing antitrust enforcement in the labor markets.

Some state legislatures have passed or are considering legislation prohibiting no-poach agreements, specifically in the franchise context. For example, in Washington, the legislature passed its Noncompetition Covenants law, effective in 2020, that prohibits franchisors from restricting a franchisee’s ability to hire or solicit employees from any of its other franchisees or the franchisor itself.¹ As another example, in 2021, the New York State Senate considered a bill titled, the End Employer Collusion Act,² which would have prohibited franchisors or franchisees from entering into no-poach agreements. It ultimately did not make it out of committee for a legislative vote. A similar bill was introduced in the New Jersey Assembly and was similarly unsuccessful.³

In court, state attorneys general have pursued alleged no-poach and wage-fixing agreements under both the Sherman Act and state antitrust laws. In November 2023, the District of Columbia obtained an Assurance of Voluntary Compliance from Hiisho International, LLC, the franchisor of a restaurant chain that operates in the District. The investigation yielded evidence of a provision in Hiisho’s franchise agreements that restricted franchisees’ from soliciting or hiring any employee of the franchisor or any of its franchisees. Although the settlement did not specify the monetary payment, it required Hiisho to cease enforcing the no-poach provisions in its agreements and prohibited it from including any no-poach clauses in its future contracts.

Most recently, a retail manufacturer in Illinois settled a lawsuit brought by the Illinois Attorney General for $1.2 million following allegations that it participated in no-poach and wage-fixing agreements with multiple staffing firms in violation of the Illinois Antitrust Act. The complaint, filed in state court in 2020, alleged that Colony Display LLC facilitated agreements between staffing companies Elite Staffing, Inc., Metro Staff Inc., and Midway Staffing Inc. in which the staffing companies agreed not to approach temporary workers employed by the other staffing agencies at any Colony location and offer them better wages or benefits. The staffing companies also allegedly agreed that temporary workers would not be allowed to move between the three agencies, and that if a temporary worker did move between agencies, they would be sent back to the original agency. If an agency violated the agreement and hired a worker originally employed by another agency, that original agency would communicate that to Colony, which would then raise the issue with the other agencies in furtherance of the agreement. Following a failed motion to dismiss the case in June 2021, Colony settled with the state, leaving the claims against the three staffing companies still pending.

These recent developments reflect how both federal and state agencies have a sustained and possibly growing their interest in preventing labor-side antitrust violations. Despite the DOJ’s recent lack of success with criminal enforcement, the DOJ seems to remain optimistic that it will soon be able to score criminal convictions in this area and views its recent string of losses as learning opportunities rather than a bellwether of inevitable defeat at the trial stage. Additionally, the DOJ’s and state attorneys general continue to experience success with civil enforcement of both federal antitrust legislation as well as their state law analogs.

Bottom Line for Employers

The recent enforcement action in this area suggests that federal and state authorities will continue to prosecute, civilly and criminally, alleged antitrust violations that they believe impede competition in the labor market. Employers should review their master staffing agency agreements to ensure that non-circumvention language is reasonably tailored and in line with the Sherman Act and similar state laws. In the staffing context, non-circumvention provisions may place restrictions on an end-client’s ability to directly hire a contingent worker who the staffing company has supplied to it. These restrictions may last for the term of the placement or longer, and may be enforced through a penalty fee paid by the end-client to the staffing company.

Staffing companies should be careful to avoid expansive non-circumvention provisions that can be read to prohibit an end-client from accepting the services of a contingent worker who has moved to a competing staffing company. Similarly, employers must consider other agreements they have with businesses that restrict employee movement from one employer to another. Staffing companies and their end-clients should think through these issues proactively at the time of engagement and enforcement, and should at all times conduct their affairs at arm’s-length of each other.