Will Competition Act Changes Shake Up Bay Street Compensation?

Canada-wide prohibition on wage-fixing and non-solicitation agreements coming into force in June

On June 23, 2023, section 45(1.1) of the Competition Act (the “Act”) will come into force prohibiting unaffiliated employers from entering into or enforcing wage-fixing or non-solicitation agreements. Wage-fixing agreements are agreements to fix, maintain, decrease or control wages, salaries or terms and conditions of employment. Non-solicitation agreements are agreements not to solicit or hire each other’s employees. Commentators on The Canadian Law Forum have suggested that some Canadian law firms may have engaged in wage-fixing, which remains generally permissible under Canadian law until June 23, 2023.

Many Canadians were shocked to learn during the COVID-19 pandemic that wage-fixing was not per se illegal when large grocers simultaneously introduced and removed $2 per hour “hero pay.” The grocers deny they engaged in wage-fixing.

When questioned by a House of Commons committee Loblaws President, Sarah Davis, said she sent a “courtesy email” to competitors to let them know about Loblaws’s decision to cut “hero pay.” However, Metro CEO, Eric La Flèche, told the committee he called executives at competitors trying to get information about when they planned to cut “hero pay.”

In 2016, the U.S. Department of Justice (DOJ) announced that they interpreted wage-fixing and non-solicitation agreements to be criminally prohibited by U.S. antitrust law and that they would start to investigate and prosecute these agreements. Previously, the DOJ had only pursued civil antitrust complaints against alleged wage-fixing and non-solicitation agreements.

Currently, the Canadian Competition Bureau can review wage-fixing and non-solicitation agreements under s. 90.1 of the Competition Act. Under this civil subsection, the Competition Bureau can order employers not to enforce wage-fixing or non-solicitation agreements if it can prove on a balance of probabilities that the agreement will substantially or is likely to lessen competition.

According to the Competition Bureau’s draft guidance on s. 45(1.1) of the Act, it will make wage-fixing agreements and non-solicitation agreements per se illegal—there will be no requirement for prosecutors to prove the agreements had any effect on competition. The Competition Bureau’s guidance is not legally binding and can be modified.

Subsection 45(1.1) is a criminal law subsection of the Competition Act. It will require proof beyond a reasonable doubt and carry a criminal penalty of imprisonment of up to 14 years, a fine determined by the court, or both.Wage-fixing and non-solicitation agreements may be formal or informal. The Competition Bureau’s draft guidance does not consider “conscious parallelism, when a business acts independently with awareness of the likely response of its competitors or in response to the conduct of its competitors” to be a violation of s. 45 of the Act. However, the guidance says “parallel conduct coupled with facilitating practices, such as sharing sensitive employment information or taking steps to monitor each other’s employment practices, may be sufficient to prove that an agreement was concluded.”

For years, there has been great convergence among large Canadian law firms’ salaries. For example, historically, in Toronto, most—but not all—large law firms pay salaries for summer students, articling students, and associates on the same grid. This salary grid is sometimes referred to as “the market rate” or the “large firm grid.”  

Currently, most large law firms’ Toronto offices pay their 2L students and articling students $1,900 a week and their first-year associates $130,000 per year. 

Almost all large firms eliminated bonuses for summer and articling students when the Toronto large firm grid “raised” students’ salaries to $1,900 per week in 2019. Many large Toronto law firms award discretionary bonuses to associates that range from 10–30 percent of the associate’s salary. Compensation for partners varies widely and does not appear to follow any discernible grid. See Table 1 for the current Toronto large firm grid.  

In many industries, salary grids change annually (often to account for inflation). The Toronto large firm grid is “updated” sporadically, with the most recent updates in 2021 and 2019.  If the first-year associate salary in the Toronto large firm grid of $130,000 per year had increased with inflation since it was set in 2021 it would be approximately $144,768 today. Law students’ salaries on the large firm grid did not change from 2007 to 2019.

Publicly, it appears the Toronto law firm grid is “updated” by one large firm announcing a raise to salaries, and then most other large law firms match the first mover’s salary raise within a couple of months. Historically, various firms have been the first mover.  

The similarity of large law firms’ salaries in Canada does not mean that law firms are engaging in wage-fixing or that they will be liable for violating s. 45(1.1) of the Act once it comes into force. There are innocuous explanations for why salaries may converge and there are defences to s. 45(1.1).

The convergence of the legal salaries may just be the result of conscious parallelism. Many firms may raise their salaries to match a competitor to avoid losing employees to the competitor. Many firms may be reluctant to raise salaries because it will increase their labour costs in the long term and only result in a recruiting edge in the short term as other firms have historically matched salary raises.

Subsection 45(4) of the Competition Act provides an ancillary restraints defence to s. 45(1.1) of the Act. It is available when a wage-fixing or non-solicitation agreement is ancillary to a broader agreement between the employers and is reasonably necessary for achieving the objectives of the broader agreement, and the broader agreement alone does not violate s. 45(1.1) of the Act. The Competition Bureau’s guidance says it will consider s. 45(4) of the Act to apply to most wage-fixing and no-poaching agreements that are ancillary to mergers and acquisitions of companies.

Other defences apply to s. 45(1.1) of the Act. For instance, the regulated conduct defence exempts employers from many competition laws if they are required to follow a valid provincial statute that conflicts with the competition law.  

I reached out to some of the largest law firms in Canada and Toronto to ask if they intended to make any changes to their human resources or compensation policies in response to s. 45(1.1) of the Competition Act coming into force. Three firms said they were already in compliance with s. 45(1.1) of the Competition Act or will ensure they are compliant with it before it comes into force. Five firms declined to comment. Eight firms did not respond to Ultra Vires’ request for comment in time for publication.

Subsection 45(1.1) of the Act does not apply to conduct before it comes into force on June 22, 2023. As such, employers are not liable for entering into or enforcing wage-fixing or non-solicitation agreements before that date. However, there is no grandfathering provision, so employers may be liable after June 22, 2023, for enforcing wage-fixing or non-solicitation agreements that they entered into before that date.    

Subsection 45(1.1) of the Act applies to agreements between employers rather than employment contracts. In some circumstances, employers can effectively prevent employees from quitting to work for a competitor by entering into a non-solicitation agreement with competitors or by putting a non-compete agreement in their employment contracts with their employees. Non-compete agreements prevent an employee from engaging in any business or work that competes with the employer after the employment relationship between the employer and employee ends.

In Canada, there are common law restrictions and in some provinces, statutory restrictions on non-compete agreements. In 2021, Ontario added s. 67.2 to the Employment Standards Act to prohibit employers from entering non-compete agreements unless they were in connection to the sale of a business or the employee was an executive.

Subsection 67.2 of the Employment Standards Act does not prohibit the enforcement of non-compete agreements that were entered into before the subsection came into force. However, they are still subject to the common law restrictions on non-compete agreements.       

It is unclear if s. 45(1.1) of the Act will have any effect on law firms’ compensation or human resources policies or cause a greater divergence among firm salaries.

Generally, economists oppose price-fixing and wage-fixing because controls on the prices of goods, services, or labour tend to distort the efficient allocation of resources in the economy.

The Competition Bureau’s guidance says “employers should take care when sharing information with each other in the course of collaborative activities, such as the benchmarking of employment terms, to ensure that the conduct does not raise concerns under subsection 45(1.1) of the Act.” Hopefully, s. 45(1.1) of the Act does not cause an unintended effect of discouraging employers from publicly disclosing salary and benefits information to jobseekers to avoid any potential concerns under s. 45(1.1) of the Act.  

Only time will tell if s. 45(1.1) of the Act will shake up Canada’s labour market.