Many employers have to be particularly careful about hiring employees under noncompete agreements with current or recent employers.
Here are eight questions for employers looking to hire the best person while respecting pre-existing agreements and a few useful tips they should follow.
#1. Can I hire an employee who used to work for a competitor?
As a general rule, yes—you can hire from competitors’ businesses.
However, the employee should first terminate his or her employment with your competitor. Keep in mind that you cannot obtain or use any of your competitor’s trade secrets the employee knows. Be sure to ask the employee about whether s/he has signed a noncompete agreement.
#2. If I hire an employee who has not signed a noncompete agreement or agreed to honor trade secrets, am I safe?
Resist the temptation to pump new employees for confidential information from their old jobs.
You’re probably OK, but keep in mind that employees can carry trade secrets in their heads.
If they disclose one to you, they have violated the trade secrets law. If you use that trade secret information, you will have probably violated the trade secrets laws as well.
Bottom line: resist the temptation to pump the former employee to give you confidential information about his/her former employer.
#3: OK, the employee promised not to disclose any trade secret information, including any in his head. Am I okay now?
Probably. To violate the trade secrets law, the disclosure requires an actual or threatened misappropriation of a trade secrets. As a general rule, if the employee does not bring or disclose any trade secrets to your company, you should be okay.
#4: Can I hire a midlevel sales associate with no knowledge or possession of his former employer’s marketing plans?
From a trade secret’s standpoint, you appear to be on solid ground. However, you also need to know whether s/he is bound by a noncompete agreement that would be breached by accepting your employment.
#5: This employee has a noncompete, but my company never signed it. We have nothing to worry about, right?
Wrong. Most states prohibit a third party from interfering with contracts between two other parties.
This is known as tortious interference with a contract. The noncompetition agreement is a contract. If your company interferes with it, the former employer may have a claim against you.
#6: How do I determine if our companies really competing?
If there is little product overlap within the shared industry, the risk of violating the noncompete may be lower. This of course requires a very careful and rigorous scrutinization by your attorney of the exact language contained in the employee’s noncompete agreement.
#7: If the agreement is enforceable, what justifications allow me to employ a competitor’s employee?
Technically, your competitor has to prove that you lack justification. You do not have to prove that you have a justification.
Proving that you lack justification requires evidence that your interference was “improper.” Courts evaluate this based on a lot of factors including:
- The nature of your conduct
- Your motive in interfering with a noncompete agreement
- Your competitor’s interests in its contract with the employee
- The interests you are pursuing
- The social interests in protecting your freedom to hire employees
- The contractual interests of your competitor
- How directly you interfered with the noncompete
- Relations between the parties
#8: What is the worst that could happen if I hire my competitor’s employee?
You could owe your competitor for lost profits and other foreseeable damages. In addition, if your competitor proves that you acted with malice or in conscious disregard of its rights, you could owe punitive damages (that’s big mula!).
In some cases, awards for tortious interference reach into the millions of dollars. My advice: consult with an employment lawyer ASAP.
Steps to Take Before Hiring an Employee Under a Noncompete Agreement
In many industries, it’s difficult to find experienced employees who aren’t under some kind of noncompete agreement. If you are heading down this road, follow these tips to make sure you aren’t violating any trade secret laws.
Ask to see a copy of the candidate’s noncompete agreement.
If you are hiring someone who is working for a competitor or has in the recent past, ask if s/he has signed a noncompete agreement. If they have, ask to see a copy of it.
This will help you determine whether the restrictions in the agreement apply to your business. Remember, your competitor may be able to enforce the noncompete with an injunction, which could end up costing your company lots of money.
Check the agreement to determine what specific restrictions it contains.
Did the previous employer require this employee to sign a Confidentiality Agreement that protects trade secrets and other proprietary information? Is the employee restricted from soliciting that business’s customers?
Protect yourself by incorporating the right language in your offer letter to ensure that your new employee, and your business, complies with the noncompete agreement’s restrictions. For example, the letter can state that the new hire is prohibited from bringing the previous employer’s trade secrets, client lists, property, or confidential information to the job you are offering.
Make sure you are correctly interpreting a candidate’s noncompete agreement.
Keep in mind that your interpretation of a candidate’s noncompete agreement might differ from the former employer’s interpretation.
Ensure that the employee leaves everything behind at the old job.
Most companies have a protocol for returning laptops, cell phones, or other hardware, as well as any confidential documents that pertain to a former employee’s work for the company.
Do not rely on the employee to comply with that protocol. Review the prospective employee’s compliance with prior employer policies before allowing him or her to start at your company.
Do you have questions and concerns about hiring employees from competitors? Contact my office to schedule a consultation to discuss your specific situation.