9 Avoiding Liability When Hiring Employees from Competitors

With skilled labor in short supply across many industries, professions, and trades, many companies have no choice other than to approach their competitors’ employees to fill positions. While poaching employees from the competition is nothing new, a growing number of employers are taking steps to keep their workforce—through confidentiality agreements, covenants not to compete, and agreements not to solicit customers (or even other employees) for a new employer. Thus, employers now more than ever must implement hiring and onboarding practices to avoid being held liable for interfering with the agreements between prospective employees and their current or former employers.

Contract Provisions and Agreements That Could Expose A New Employer to Liability

Employers are finding many new ways to secure their workforce and protect the business. Such provisions and agreements include, for example:

  • Non-Solicitation Agreements: A non-solicitation agreement typically governs an ex-employee’s right to solicit customers of the business after he or she leaves his or her employment. These agreements might not only limit a former employee’s ability to solicit customers the employee serviced but also customers of the entire business—as well as former customers and prospective customers. Frequently, a non-solicitation provision will also limit an employee’s ability to recruit other employees to join the departing employee at the new employer.
  • Non-Compete Agreements: A non-compete agreement typically limits an ex-employee’s ability to join a competitor or otherwise compete with the former employer during the employment relationship and for a period of time thereafter. Texas law, for example, allows for non-competes that prohibit an employee from performing services competitive to the employer as long as they contain reasonable limitations as to time, geographical area, and scope of activity to be restrained that do not impose a greater restraint than necessary to protect the former employer’s goodwill or other business interests. But even if a non-compete is unreasonable, however, a court has the power to reform the agreement to impose reasonable restrictions and enforce it prospectively through an injunction.
  • Confidentiality Agreements: A confidentiality agreement is useful to prohibit employees from disclosing company confidential and proprietary information.

The Company’s Exposure

Although the new employer itself did not enter into any agreement with the ex-employer and thus would not be liable for breach of contract, the hiring company could face liability for unfair competition, tortious interference with contract, or misappropriation of trade secrets. If the ex-employee owed fiduciary duties to his or her ex-employer, the new employer might find itself defending claims for knowingly participating in or aiding and abetting that employee’s breach of fiduciary duty. All of these non-contract claims are tort claims, so the plaintiff could seek punitive damages in addition to compensatory damages, such as lost profits.

Perhaps a worse outcome for a company that has incurred the time and expense of hiring a new employee, the company may lose the ability to meaningfully capture benefit from the employee’s efforts when the ex-employer seeks to enforce its contracts against the employee—which often occurs through an injunction against both the employee and new employer.

Avoiding Risk of Liability

Many practices can be implemented to reduce these hiring risks. For example:

  • Minimize Risk During the Recruitment Process: Employers can minimize exposure in the hiring process by taking simple steps such as asking prospective employees to avoid disclosing their employer’s strategies, customers, and other confidential information during the hiring process. Additionally, employers should ask candidates to avoid discussing employment opportunities using the current employer’s resources. Instead, these discussions should be conducted during the candidate’s personal time using personal email addresses and phone lines.
  • Identify Existing Contractual Restrictions: Early in the hiring process, a hiring employer should determine whether a job candidate is subject to any post-employment restrictions. Because these restrictions may be associated with other agreements, employers should investigate whether any restrictions are in these other agreements, such as stock option agreements, deferred compensation agreements, and bonus plans.
  • Legal Review and Assessment of Applicable Post-Employment Restrictions: Laws governing post-employment restrictions are complex, vary by state, and often depend on the specific restriction and work to be performed by the new employee. Thus, in a growing virtual economy, it is important that post-employment restrictions are reviewed by a well-versed legal expert who can also gather information about the ex-employer’s past efforts to enforce its restrictive agreements. A legal expert can also work with the company to determine if the duties and responsibilities of the position can be restructured to avoid running afoul of any contractual restrictions. Alternatively, the employer might consider placing the new employee in a temporary position for the duration of any contractual restriction or, in certain circumstances, asking the candidate to request a waiver of any contractual restrictions from his former employer.
  • Ensure New Employees Leave the Right Way: New employees coming from a competitor should be prohibited from using or bringing their previous employer’s confidential information with them to their new job. Copies of client lists, contact information, marketing strategies, business information, and other potentially proprietary information should be returned before the employee begins their new position at the competing company. This may be difficult if their personal technology contains any former employer information, including their cell phone or laptop. Companies should remind their new employees to double-check their personal technology and delete any information from their previous employer before beginning their employment.
  • Monitor: While any former employment restrictions are still active, the new employer should monitor the employee’s duties and responsibilities to ensure that the employee remains in compliance with his or her prior agreements.

Experienced Employment-Restriction Lawyers

The effective handling of post-employment restrictions requires a deep knowledge of contract, fiduciary, and tort law—often spanning multiple states—as well as experience working on these specialized types of cases. The business litigation lawyers at Burford Perry have significant experience assessing, defending, and enforcing post-employment restrictions and are available to assess the potential risk and liability exposure to your company when hiring employees from a competitor.

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