Last month, the Federal Trade Commission issued a press release detailing its latest enforcement action against businesses it says are engaging in anti-competitive practices. More recently, the FTC directed its attention towards a building services contractor, Adamas Amenity Services LLC, alleging that it’s unlawfully using no-hire agreements.
No-Hire Agreements – What’s the Scoop?
No-hire provisions in a contract are clauses that prevent one company from hiring the employees of another company for the duration of the agreement and usually for a period of time after the relationship ends. No-hire provisions differ from noncompete clauses in that they involve agreements between businesses, not between employer-employee, or between a business and its independent contractor.
An example can clarify this. When RoboCop company hire Gems Cleaning Service, a no-hire contract will say that RoboCop can’t hire any of Gems’ employees directly, either while the RoboCop/Gems contract is in place or for a period of 24 months after its termination. That’s a very typical no-hire provision in a business-to-business contract.
As you can see, no-hire agreements are more similar to employee non-solicitation agreements, where one company agrees to not actively recruit or steal away another company’s employees.
FTC’s Enforcement Against Anti-Competitive Conduct
As we discussed in a blog post last year, the Trump Administration’s FTC launched a Labor Markets Task Force. The Task Force’s purpose is to investigate and prosecute deceptive, unfair, and anti-competitive labor-market practices. Recent enforcement includes an action taken against Gateway Services, Inc., which stopped the enforcement of nearly 1,800 noncompete agreements. While the FTC has made clear that noncompete agreements are an example of anticompetitive conduct, the action against Adamas signals no-hire agreements likely will receive the same level of scrutiny.
The FTC’s Attack on Adamas
According to the FTC’s complaint, Adamas contracted with building owners and management companies across New York City and New Jersey. In so doing, Adamas used no-hire agreements to restrict those building owners and management companies from directly or indirectly hiring Adamas’ employees without facing a significant penalty.
The complaint also alleged that for Adamas employees, who are mainly low-wage workers performing janitorial, security, front desk, and other similar services, the no-hire agreements restricted worker mobility, suppressed or undermined wage negotiations, discouraged customers from switching vendors, and deterred competitors from bidding or expanding.
To resolve the FTC’s complaint, Adamas must agree to immediately stop enforcing all existing no-hire agreements under the proposed FTC consent order. Along with ending its enforcement of no-hire agreements, Adamas also is required to:
- Treat current no-hire clauses as null and void;
- Notify customers from the last 3 years that the no-hire agreements are unenforceable;
- Notify employees that they may seek jobs with building owners or replacement vendors;
- Post workplace notices confirming that no-hire agreements no longer apply; and
- Comply with training, monitoring, and reporting requirements for up to 10 years.
Takeaways for New York Employers
We know the FTC reflects federal law. As we noted in a blog post last year, New York doesn’t have a law that explicitly bans noncompete agreements, and the same goes for no-hire agreements. There’s a proposed bill (S4641) in the New York State Senate that would ban nearly all noncompete agreements, but this bill is yet to be passed. As a reminder, if the bill becomes law, employers would have 30 days to comply with the ban before the law goes into effect, as it’s intended to apply to contracts entered into or modified on or after the effective date.
In the federal arena, however, employers should remain aware of the FTC’s attention on anticompetitive behavior, even absent an explicit FTC rule banning noncompete or no-hire agreements. This is especially true given the FTC’s emphasis that enforcement against labor-market restraints remains an active priority. This is not to say that all companies using no-hire agreements will be prosecuted. Narrowly-drawn provisions that are reasonable to achieve legitimate, pro-competitive objectives may be enforceable.
Employers should take into account several key considerations from the FTC’s action against Adamas:
- The agreements at issue appeared in customer and vendor contracts, meaning this is not simply an HR issue. Operations, procurement, and facilities teams can create anti-competitive risk.
- “We don’t enforce it” isn’t a defense to the FTC. Even dormant no-hire language can create risk exposure according to the FTC.
- No-hire clauses are being treated as market restraints, not restrictive covenants. The focus is competition for workers and the market, not whether an employee signed a noncompete.
- If you’ve got one of these agreements, keep in mind that modifying them can be more challenging than simply stopping their use in the future. Notice requirements to customers and employees may create operational and relationship challenges.
We’re watching this enforcement action along with developments at both the federal and State legislatures, and we’ll keep reporting what we’re seeing.
If your company’s vendor or service agreements restrict who can hire whom, now may be the moment to take a closer look.
If you’ve got questions about no-hire agreements or other aspects of employment law, feel free to contact us at 716.839.9700 or info@coppolalegal.com.
