It is common for high level business executives, skilled professionals, physicians and other key employees to enter into employment contracts with their employers. It is also common for these employment contracts to contain restrictive no-solicitation and no-compete provisions that prohibit these employees from competing with the employer in a defined territory and for a defined time.
Caution: Problems When an Applicant Has a Restrictive Agreement
If you are recruiting an applicant who may have a restrictive no-compete agreement with a previous employer you need to be careful to make sure that you don’t get caught up in somebody else’s dispute.
Here is what can happen if you hire someone who is in breach of a restrictive no-compete or no-solicitation agreement:
- The previous employer can prevent the employee from working for you;
- The previous employer can recover its economic losses from the employee who was in breach;
- If you knew of the restrictive agreement but let the employee work anyway, you could be liable to pay the other employer for any profits you gained by knowingly employing that employee;
- If you knew of the restrictive agreement but wrongfully engineered a breach you could be liable for all damages arising from the “tortious interference” with a valid contract;
- Employees who the employee solicited in violation of the no-solicitation agreement might be prevented from working for you;
- If litigation happens – even if you are not a named defendant – your financial and business records may have to be disclosed to the previous employer who is likely a competitor; and
- You would have to endure months of uncertainty and the costs of defending claims that may not even be meritorious.
How to Avoid Problems
In order to minimize these risks employers should consider taking these steps when recruiting employees who may have a restrictive agreement:
- Advise the applicant in writing to make sure that there are no contracts or agreements that prevent the prospective employment;
- If a contract or agreement is identified by the applicant, insist in writing that the applicant abide by the restrictive terms;
- Recommend in writing that the applicant obtain independent legal advice on the parameters and validity of the restrictive agreements. Do not offer or agree to pay for the applicant’s counsel;
- Consider your own independent legal review of the applicant’s restrictive agreements if the applicant will share the agreements with you;
- Encourage the applicant to sign an acknowledgement that the applicant has not been induced to violate any no-compete, no-solicitation or confidentiality provisions of existing agreements;
- Advise the applicant to terminate existing contract(s) strictly in accordance with the termination provisions of those contracts;
- In any agreement, include a representation from the new employee that there are no restrictions on the ability to accept employment and that the employee is free to engage in the employment that was offered;
- Consider making any employment offer contingent on the applicant’s full compliance with the terms of any valid existing agreements and that reserves the right to terminate employment in the event of litigation; and
- Consider structuring the applicant’s future employment so as not to be in conflict with any valid restrictions as to scope of work, geographic location and duration.
Disputes over the scope of restrictive agreements can get very emotional and very expensive for all sides of the dispute. While courts do enforce valid restrictions, often the dispute is settled short of trial after much effort and frustration. That’s why it’s best to be careful at the beginning and cover all the bases before you find yourself tangled in someone else’s dispute.
If you have any questions please contact Carrie Turner at cturner@wp.hallrender.com, Dana Stutzman at dstutzman@wp.hallrender.com or your regular Hall Render attorney.
