United States: Hiring Employees Who May Have Non-Compete Agreements: Best Practices

Last Updated: January 11 2016
Article by Jonathan Krause

If your company's fiscal year follows the calendar year, you are in the process of preparing the 2016 FY budget and, in connection with that process, anticipating hiring needs. Unsurprisingly, ideal candidates may come from competitors or other companies that have valuable confidential information and customer relationships they want to protect. If these candidates have agreements with their current employer that appear to impose non-competition or non-solicitation restrictions, are you unable to make the hire? Not necessarily. Below are some best practices for hiring talent that have restrictive covenants with their current employer:

1. Determine Whether There is An Agreement. Early in the process, the company should definitively ask the candidate whether they are subject to any employment agreements or restrictions with their current employer. The answer may not be as obvious as it sounds: long-time employees may not recall the documents they signed when they started work and non-compete terms may be tucked away in incentive compensation plans unbeknownst to the candidate. The company representative interacting with the candidate needs to ask probing questions to determine whether any agreement exists. If candidates represent there is no such agreement, have them acknowledge as such in writing and make clear that employment is contingent on the accuracy of that representation (if the candidate would otherwise receive an offer). You don't want to buy potential six figure litigation because a candidate is lying to you or not doing a thorough search. You also don't want to become invested in a candidate without knowing the risk that the hire can bring to your company.

2. Assess Whether the Agreement is Enforceable. If the candidate has an agreement with post-employment restrictions, the company MUST ask for a copy of the agreement to review. Ignorance of the actual language will not protect the company and is more likely to get the company in trouble, as judges will not look kindly at a failure to ask for an agreement that the company knows exists. In consultation with legal counsel, the questions you should be asking include:

  • Does the agreement have non-competition, non-solicitation, or other restrictions?
  • Can the company live with the restrictions as drafted?
  • Are those restrictions enforceable under the applicable law based on scope of the restriction, duration, geographic scope, or the consideration the candidate received for entering the agreement?
  • How do the restrictions line up with the actual responsibilities performed by the candidate for the prior employer? Remember, unlike most contracts, these agreements will generally not be enforced solely on the contractual terms, but based on whether the restrictions are needed to protect legitimate protectable interests. This means, for example, that an agreement may not be enforced if it seeks to prevent a candidate from working for non-competitors or from calling upon potential customers that the candidate never dealt with at the prior employer.

3. Adjust the Job Duties or Impose Restrictions as Appropriate. If the candidate is attractive, the fact that he or she has post-employment restrictions does not have to be a deal-breaker. These restrictions are only enforceable to the extent necessary to protect the old employer's legitimate interests. In other words, if the candidate's employment with you would be in a position where he or she would be performing different job duties than what the candidate did for the old employer and these job duties are not competitive with duties performed for the old employer, the agreement may not be enforceable. Consider scoping out the position so that the candidate would not be performing job duties that should alarm the prior employer. For example, consider restricting a sales representative to a different territory or only to prospects the representative did not service for the prior employer. You can also consider imposing these restrictions on the job duties for a period less than the time provided in the agreement if you conclude the duration of the agreement's restrictions are too long. The scoping process is a partnership among the business, legal, and HR to determine what restrictions are reasonable that appropriately limit litigation risk but still let the company get value from the hire.

4. Instruct the Candidate on Not Taking the Prior Employer's Business Information. Under no circumstances should a new hire take or keep the prior employer's confidential information. Hires should be specifically instructed that they are not to take such information, that in their final days with the old employer they should avoid looking at confidential files that are unrelated to the performance of job duties, and they should make sure to return all documents to the old employer. Employees, whether because of bad intent or temporary panic, are often inclined to take documents out the door for their benefit or as a crutch. A hire's attaching a thumb drive to the work computer or taking a client list "just in case" often leads courts to enforce agreements they otherwise would not be inclined to enforce because they conclude the employee is a bad actor who cannot be trusted. The result is the company ends up paying legal fees in litigation, loses a desired hire when the restrictions are enforced, and ends up with a black eye in the public.

5. After Hire/Resignation, Consider Proactively Contacting the Prior Employer. When a key employee leaves for a competitor, there is an inclination to fear the worst and rush into litigation. Under appropriate circumstances where the hire's duties have been scoped out so that you think you have reasonably addressed the old employer's legitimate concerns, consider pro-actively contacting the company to lay out the restrictions and the instructions you have provided the new employee regarding the non-disclosure of the former employer's confidential information. This path may be sufficient to reassure the prior employer and prevent litigation or position the company as the benevolent actor in the event of litigation because you can demonstrate that you have attempted to address whatever legitimate needs the old employer may have. This approach may not work in every hiring decision, depending on the company's relationship with the prior employer and the nature of the hire.

A candidate's non-competition agreement does not need to be the end of the recruitment process. With careful planning and proactive consideration of the potential issues, the company may reap the benefit of desirable talent without incurring litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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