Understanding and Managing a New Hire’s Contractual Obligations To a Prior Employer

Prudent employers take steps to ensure that their employees do not disclose their confidential information and, in appropriate circumstances, contractually restrict them from soliciting their customers and employees after leaving employment.  But what about the contractual restrictions that new employees may have to their former employers?  The time to find out about non-compete, non-solicitation and non-disclosure agreements is during the hiring process.  Overlooking this key step in hiring due diligence can have dire consequences.  The new employer may be sued for damages by the former employer for interfering with its contract with a former employee, and may be subject to a court order restricting the activities of the new hire or even prohibiting continued employment altogether.

Get The Agreement!

All employees are prohibited by law from disclosing the trade secrets of their former employer.  Candidates for employment may, however, have additional confidentiality restrictions or other restrictions on future work activities based on a non-compete, non-solicitation or confidentiality agreement signed with a former employer.  The first step in assessing any restrictions that may exist is to obtain and review any such agreements.  A new employer should not accept the candidate’s word that an agreement does not restrict him or her from performing expected duties, or the candidate’s assurances that the prior employer never enforces such agreements.  Some candidates may even forget that they signed a contract some years earlier when starting their last job.  A new employer should make sure the candidate inquires and obtains copies of any applicable non-compete, non-solicit or confidentiality agreement.  If a candidate does not have copies of such agreements, then he or she should obtain them.  Virtually every state allows an employee to obtain a copy of his or her personnel record, which is a good way to obtain any pertinent agreements without necessarily tipping the employer off that the candidate is exploring a new opportunity.

Analyze The Risk

The new employer should review any agreements that the candidate has with the prior employer.  If prior employment is of relatively short duration, the new employer may want to check back even further to review restrictions with earlier employers that may still apply.

The terms of a candidate’s agreement with a prior employer may pose virtually no risk to the new employer.  For example, a software sales representative seeking to join a pharma sales team will probably not be restricted from doing so by an agreement that prohibits competition and calling on former customers.  At the other end of the scale are contractual restrictions that should effectively end the hiring discussion.  For example, the software sales representative with a non-compete and non-solicit agreement who, if hired by a new software company, would work in the same territory, targeting the same customers.  Not all cases, however, are that clear cut.

Manage The Risk

In some cases, a candidate may have restrictions that would prohibit some—but not all— activities in the new workplace.  The most common example is a sales representative whose agreement provides that he or she cannot call on the customers that the sales representative pitched or sold to when employed by the prior employer.  In such cases, the new employer may chose to go forward with hiring, but should take proactive steps to ensure that it is not liable for the sales representative breaching a restrictive agreement.  New employers should give clear written instructions to the candidate, if hired, about not disclosing confidential information belonging to the prior employer and taking a “hands off” approach with regard to any customers, employees or territory for which the candidate has prior restrictions.

Legal Issues

In some instances, an employer working with legal counsel may decide that contractual restrictions purporting to prohibit certain post-employment conduct by the candidate are not enforceable.  In such instances, the new employer should review and fully understand the risks of going forward.  Sophisticated candidates may also ask the employer to indemnify them in the event that they are sued.  Indemnification agreements provide that the new employer will be responsible for the new hire’s legal fees and any liability in the event that the employee is sued by a former employer claiming a violation of the agreement.

Being surprised by a cease and desist letter from a new hire’s former employer, or worse being served with a court complaint, is not a welcome development for any business.  Prudent employers will do their due diligence in the hiring process to avoid—or at least manage—the risks associated with their new hires’ contractual obligations to former employers.