New rules prohibiting wage-fixing and no-poaching agreements kick in Friday in an effort to crack down on companies undermining competition at employees’ expense.

Here is what employers and employees need to know about the new rules:

What is the new law?

As of June 23, it is a criminal offence for two or more employers to form deals that fix, maintain, decrease or control wages. The same goes for agreements that prevent companies from hiring or soliciting each other’s employees.

It comes after the federal government made amendments to the Competition Act’s conspiracy provision in June 2022 as part of its Budget Implementation Act.

“Like price-fixing agreements between competitors, wage-fixing and no-poaching agreements undermine competition,” states the Competition Bureau, which is responsible for the administration and enforcement of the Competition Act.

“Maintaining and encouraging competition among employers results in higher wages and salaries, as well as better benefits and employment opportunities for employees.”

The penalty for violating the wage-fixing and no-poaching provisions includes imprisonment for up to 14 years, and/or a fine to be set at the discretion of the court.

What’s different from before?

Section 45 of the Competition Act has until now criminally prohibited agreements between competitors to fix prices, allocate markets or restrict output.

But that didn’t apply to companies’ practices when compensating for labour. Instead, agreements between competing purchasers were viewed under civil provisions contained in Section 90 of the act, which prohibits deals likely to substantially prevent or lessen competition.

“So if an agreement between competing purchasers resulted in anti-competitive effects, such as higher prices, then that agreement could be challenged and be prohibited under the civil provisions,” said Adam Goodman, a partner at Dentons’ competition and foreign investment review group.

“What the new law does is make it a criminal offence for a subset of buyer-side conduct segments.”

Under the previous provision, fines were capped at $25 million.

“The wage-fixing and no-poaching amendments coming into force is an important step in the ongoing modernization of Canada’s competition law,” competition commissioner Matthew Boswell said in a press release.

Who do the new rules apply to?

The amendment applies only to pacts between unaffiliated employers. That means wage-fixing or no-poaching agreements between two or more corporate entities controlled by the same parent company do not violate the provisions.

While the rules cover wage-fixing and no-poaching agreements between employers regardless of whether they compete in the supply of a product, the Competition Bureau said it expects to prioritize its enforcement on arrangements between companies competing for labour.

The new law also only targets no-poaching provisions that are mutual in nature. If only one company agrees not to hire another’s employees, the Competition Bureau says that’s not caught by the legislation.

Are there other notable exceptions?

The Competition Bureau says the law is directed at “naked restraints” on competition, which include restrictions on wages or job mobility that are not implemented to further a legitimate collaboration, strategic alliance or joint venture.

It said it intends to target restraints that “are clearly broader than necessary in terms of duration or affected employees, or where the business agreement or arrangement is a sham.”

The rules do not cover “ancillary restraints” on competition meant to add efficiency to “certain desirable business transactions or collaborations.” The ancillary restraint defence is available to employers when it is likely the restraint flows from a broader or separate agreement that includes the same parties and the arrangement is reasonably necessary to achieve an overarching objective.

If the parties could have achieved an equivalent or comparable arrangement through “significantly less restrictive means that were reasonably available,” then the bureau said it would conclude the restraint was not necessary.

The bureau said it will also generally not assess wage-fixing or no-poaching clauses that are ancillary to merger transactions under the new criminal provisions.

“This is really reserved for naked restraints, where the parties are essentially trying to game the system or cheat in terms of no-poaching, wage-fixing, to the detriment of employees,” said Goodman.

What prompted this change?

Goodman said there’s been heightened attention toward the issues of price-fixing and no-poaching deals both in Canada and internationally over the past decade.

In the U.S., he said momentum started in 2010 when the Department of Justice challenged a no-poaching arrangement between major tech firms on a civil basis. Then in 2016, the department, along with the Federal Trade Commission, released a guidance indicating they would challenge such agreements on a criminal basis, which Goodman noted has had “limited success.”

The issue ramped up in Canada during the pandemic when grocery giants Loblaws, Sobeys and Metro ended a bonus program for hourly workers known as “hero pay” on the same day in June 2020, prompting questions about possible co-ordination.

While the companies told a House of Commons committee later that year that they had acted independently, Loblaw’s then-president Sarah Davis acknowledged she had sent a “courtesy email” about the move to competitors in advance.

In late 2020, Canada’s Competition Bureau released a guidance that clarified it couldn’t challenge wage-fixing and no-poach agreements on a criminal basis due to the wording of existing legislation.

“It was always an option for the Competition Bureau to challenge no-poach, or wage-fixing conduct if they thought it resulted in anti-competitive effects and they never brought a case,” said Goodman.

“It’s not as though there was an issue with the tools having been proven to be inadequate for the job. The tools were never used.”