The latest guidance note produced by the Institute’s Competition Law Interest Group focuses on how employment practices need to adapt to Hong Kong’s emerging competition regime.
Hong Kong’s competition regime is still in its formative stage. The conduct rules of the Competition Ordinance are now in their third year of operation, but substantive rulings by the Competition Tribunal are only now beginning to emerge to indicate more clearly how the provisions of the ordinance will be interpreted.
On the other hand, the Competition Commission has issued guidance on key issues in competition compliance and has highlighted particular areas where business practices in Hong Kong may be in breach of competition law. The Commission published a bulletin earlier this year, for example, highlighting its concerns regarding certain employment practices, particularly in relation to terms and conditions of employment that may be deemed to injure free competition within Hong Kong for the procurement of labour (Advisory Bulletin, 9 April 2018, available on the Commission’s website: www.compcomm.hk).
The third guidance note produced by the Institute’s Competition Law Interest Group (CLIG), now available on the Institute’s website: www.hkics.org.hk, highlights these potentially problematic employment practices to protect organisations and governance professionals against their liability risks under the Competition Ordinance.
Employment contracts restricting an employee from joining competing companies after the termination of the contact are not uncommon in Hong Kong. The Institute’s guidance note warns that these non-compete clauses, particularly if they are of an unduly long duration, may be considered to breach the Competition Ordinance. The guidance recommends that ‘restrictions on employees should go no further than is necessary to protect the legitimate business interests of the employer, such as preserving customers, clients and confidential information’. The guidance adds that legal advice should be sought if a non-compete period exceeding six months is proposed.
Agreements with competitors in relation to employees
The Institute’s guidance also emphasises the need for organisations to independently determine the employment terms and conditions they offer employees. The Competition Commission’s Advisory Bulletin points out that ‘Undertakings that reach an agreement in relation to any aspect or element of compensation or exchange of information about their intentions in this respect are, effectively, fixing the price of labour.’ The Commission’s Guideline on the First Conduct Rule makes it clear that the concept of ‘entering into an agreement’ will be broadly interpreted. This does not have to be a written agreement, for example, but could be an understanding or verbal promise between the parties involved.
Organisations need therefore to be particularly vigilant about anything that could be interpreted as being an agreement or concerted practice in relation to the terms and conditions of employment and the hiring of employees. The guidance note points out that ‘non-poaching agreements’, where organisations agree not to solicit or hire each other’s employees, fall into this category. Moreover, the sharing of competitively sensitive information, such as the terms and conditions employers’ offer their employees, is likely to be deemed a concerted practice. Compensation in this context is not limited to salaries and wages but can include benefits and allowances such as insurance benefits, housing allowances, relocation support, severance payments or long-service payments.
The Institute’s guidance note therefore advises organisations to avoid communicating, whether deliberately or inadvertently, such information to other employers. This has implications for organisations which conduct, or engage third parties to conduct, salary surveys. To minimise the risk of contravening the Competition Ordinance, the guidance note suggests that any such surveys should collect historical salary data from a pool of companies, collating the data and distributing it in an aggregate and anonymised form.
Incidentally, employees can exchange information on salaries and benefits with other employees. The Competition Commission does not consider an employee (as distinct from a self-employed sole trader) to be subject to the conduct rules under the Competition Ordinance. Moreover, trade unions may act on behalf of their members in collective bargaining with employers, as these fall outside the scope of the Competition Ordinance.
The CLIG guidance note also highlights, for the benefit of employers and governance professionals, the significant penalties on companies and individuals for breaches of Hong Kong’s competition law. The maximum fine for each contravention of the competition rules is 10% of the turnover of the company group in Hong Kong for each year in which the contravention occurred, up to a maximum of three out of the last five years (based on the years with the highest turnover).
A hefty fine is not, however, the only risk to consider. The CLIG guidance note warns that there is also the risk of follow-on liability in Hong Kong. Companies found to have breached the rules may also be exposed to follow-on damages action by persons who have suffered loss or damage as a result of the breach.
Moreover, businesses should also consider the risk of multi-jurisdictional investigations and enforcement. Brent Snyder, Chief Executive Officer, Competition Commission, in interview with this journal, said this is ‘one of the most significant developments in competition enforcement over the last 20 years’ (see the In Profile interview, CSj, May 2018 edition). He added that he had personally worked on cases where companies had paid fines in four or five or even more jurisdictions.
Another liability risk highlighted by the CLIG guidance relates to the policy of the Competition Commission to target individuals as well as companies to ensure compliance. In the same CSj interview, Mr Snyder commented that ‘companies can only act through their employees, and my view is that if you want to deter companies from acting illegally you have to deter the officers, directors and employees. That means seeking sanctions against them. Holding individuals accountable will be a part of our cases going forward.’
Directors can be banned from being a director or managing a company for up to five years, irrespective of whether or not they were personally involved in the breach. The CLIG guidance points out that company secretaries may themselves be held personally liable if they are found to have knowingly been concerned in a breach of the Competition Ordinance. They also face the risk of imprisonment if they commit a criminal offence under the Competition Ordinance.
Such cases usually relate to obstructing a regulatory investigation by the Competition Commission, such as:
- providing false or misleading information to the Competition Commission
- failing to produce documents in response to a lawful request
- destroying or falsifying documents, or
- obstructing a search by the Commission.
The message for governance professionals
The Institute’s Interest Groups, established under the Technical Consultation Panel in 2016, have a remit to look into key areas of corporate governance and company secretarial practice with a view to producing guidance to the Institute’s members and the wider profession and community. Following this remit, the latest CLIG guidance note addresses the need for all governance professionals, and for company secretaries in particular, to ensure that competition compliance receives the attention it needs from the board.
‘The company secretary needs to be aware of particular emerging issues and to raise competition law compliance generally as an agenda item with the chairman/board, where appropriate,’ the Guidance states. Given the clear indication that the Competition Commission will have a focus on the need to ensure employment practices do not contravene the Competition Ordinance, company secretaries would be well advised to ensure the board and the company is aware of the heightened liability risks in this area.
‘Companies should therefore conduct a competition audit, establish appropriate rules and regulations and work to adopt overall competition law risk mitigation with appropriate internal team(s),’ the guidance note states. At the minimum, organisations need to understand the relevant provisions of the Competition Ordinance, the powers of the Competition Commission, and be ready to deal with issues such as dawn raids and requests for information.
The guidance note reviewed in this article is available from the Publications section of the HKICS website: www.hkics.org.hk. More information on the Competition Commission’s recommendations relating to employment practices, in particular the Commission’s Advisory Bulletin of April 2018 and its Guideline on the First Conduct Rule, is available on the Commission’s website: www.compcomm.hk.