Recruiting talented employees is key to the success of any business. Doing so can be tricky, however, particularly when the person you want to hire is working for the competition and is subject to postemployment restrictions, such as non-competition and customer non-solicitation covenants. The following provides some basic guidance for what you and your company should do when faced with such a situation.
Ask the right questions of the prospective employee. Foremost, it is important to know whether the individual you intend to hire is bound by any post-employment restrictive covenants with a previous employer. Generally, you will be looking for non-competition, nonsolicitation agreements (possibly including restrictions against soliciting the former employer’s employees, customers, contractors, suppliers, or vendors), and confidentiality agreements, but all potential restrictions should be explored. In addition to the more traditional employment agreement, post-employment restrictive covenants can exist in many different types of employer documents (e.g., company ethics statements, employee handbooks, invention assignment agreements, confidentiality or technology use agreements), or other documents signed by the employees. So, push the prospective employee to investigate all potential sources of restrictions to which the prospective employee may be subject. It can be disappointing to find out that your potential new star may be bound by post-employment restrictions, but it is best to know such information in advance, so that you can assess the risks in hiring the person and develop an appropriate strategy if you decide to proceed with the person’s hiring. Finding out about a prospect’s post-employment restrictions is only the beginning of the company’s analysis.
Review and analyze the restrictions. If the individual is subject to post-employment restrictions, review them carefully to determine the nature and scope of the restrictions and how they might impact the person’s employment with you. The analysis should include the likelihood that a court will enforce the restrictions, which will vary according to the applicable state law and circumstances. The assessment should also include both a legal analysis of the restrictions’ enforceability and practical considerations such as past enforcement history of the employer, importance of this person to the former employer, extent to which employment with you differs from prior employment. You should then assess what steps can be taken to minimize as many of the restrictions as possible. This analysis will rely heavily on the nature and scope of the restriction, the applicable law, and the nature of the prospective position.
Determine the precise scope and duties of the prospective job. Even though the individual may be subject to post-employment restrictive covenants, the job for which you intend to hire the person may not fall within the restrictions. Or, inasmuch as most restrictive covenants will expire — sometimes in a matter of months — you may decide that the company can tailor the scope of the intended position so that the new employee can bide his her time until the restriction period expires, while still adding value, but without violating the individual’s obligations to the former employer. Can the person be employed in a different capacity until “real” restrictions lapse? Can the person be employed outside geographic restricted area or assigned to existing customers different from those of the former employer? Finally, once you have determined the scope of the intended new position, talk to legal counsel about what parts of the postemployment restrictions are likely to be enforceable.
In addition to a review of the applicable law, such discussions should include a review of the industry and whether post-employment restrictions are commonplace, a review of the relative competitive positions of your company and the prospect’s employer (including whether the two companies compete for the same customers), and a frank review of your company’s flexibility in defining the scope of the intended position. This discussion can often be helpful in coming up with a solution that permits the company to bring on the new employee with an eye to the risk and likelihood of a successful challenge by the former employer. The key is to analyze and take available appropriate steps to minimize the risk of being sued, or, if sued, the risk of a lengthy or costly suit, including a possible settlement strategy before suit is even brought. The employee, especially if sophisticated or represented by an attorney, may seek indemnification. You should determine whether you are willing to entertain such a request. You will also want to consider what type of an escape strategy you will want in terms of the employment and/or indemnification, i.e., how can you pull the plug if litigation that ensues is going badly or you find the new employee was not truthful about not taking anything or contacting customers of the former employer.
But, even before an analysis is complete and a decision has been made to hire the person, there are steps you should take from the initial contact to minimize the risk of suit if you proceed with the hiring.
Protect your company from the beginning. Companies often get into trouble when recruiting a prospective employee long before the actual hire. Employees may pitch their importance by showing you their customer list and sales volume, but these items are likely to be considered confidential by their employer, if not trade secrets. Further, the employee may offer to bring with them a junior colleague and provide you with confidential information about the employee, or start contacting customers about the person’s intentions. Those actions may have already violated the person’s restrictive covenants. Ground rules for such activity should be established during the interview process, in writing, if possible. Also obtain written confirmation that the interviewee is not under any undisclosed restrictions and communicate, in writing, that the prospective employee must not disclose or use confidential information or trade secrets and must not bring any property or information belonging to the employer. Follow through and make sure the person complies fully with those mandates.
Hire away, but proceed with some caution. There are often many creative approaches to hiring talented employees who are subject to valid post-employment restrictions. Such a plan typically involves taking some risk that parts of the post-employment restrictions are not enforceable, and also reaching a decision that there are some parts of the restrictions that you expect the new employee to follow. It is important that you communicate, in writing, what you expect of the new employee. For instance, you and counsel may reach the conclusion that the prospect’s non-competition restrictions are overly broad and will not be enforced under the circumstances, but that a court is likely to enforce a customer non-solicitation covenant. Typically, the company’s offer letter is a good place to memorialize such expectations. In our scenario, the offer letter should state, as a condition of employment, that the new employee will not use or possess his former employer’s confidential information and that the employee will not solicit former clients (as well as any other restrictions that your company expects to be followed).
The new employee’s supervisor should also take steps to ensure that the employee is sticking to the plan. For example, a supervisor should review any new sales or prospects that were not originally on the new employee’s customer list to ensure that the new clients are not restricted.
Although there is no way to prevent a suspicious former employer from challenging your company’s hiring of one its employees, following the guidance in this article will place your company in a better position in the event of such a challenge.
Finally, if you find that there is an acceptable risk in proceeding with the hiring, don’t make the same mistakes the former employer made that allowed you to proceed with the person’s hire. Get an enforceable agreement with your new employee from the start — one that will protect the company’s confidential information and competitive position by imposing impose valid restrictions on the employee if he or she decides to leave.