Hiring an Employee Subject to a Restrictive Covenant: Risky or Smart Business?

Covenant not to competeWhat company wouldn’t want their competitor’s employees? They already have the specialized industry knowledge and skills that can help your company be successful.  However, hiring a direct competitor’s employees raises many concerns, especially if that employee is subject to an employment contract that contains restrictive covenants, i.e., noncompete, nonsolicitation and/or nondisclosure clauses.

Does that mean if a candidate who is subject to a restrictive covenant applies for a position at your business that you must automatically turn that person away?  Not necessarily. An employer needs to conduct due diligence in the hiring process to be aware from the outset what its risks are, if any, if it decides to hire that individual. Not only can a former employer sue the potential employee for breach of the employment contract, among other things, but it also could sue the hiring employer under various claims, including wrongfully interfering with the employee’s contract with the former employer.

You also must be careful when hiring an employee who is subject to a nondisclosure agreement and/or had access to his or her former’s employer’s trade secrets and confidential proprietary information. Safeguards should be in place so that the new employee does not communicate the former employer’s trade secrets or confidential information and does not use this information for the new employer’s benefit.

Otherwise, a hiring employer could be exposed to not only steep monetary damages and an injunction (among other remedies), if the former employer files a federal claim under the newly enacted Defend Trade Secrets Act (DTSA) for the misappropriation of its trade secrets, but damages under state laws as well.

So what should a prudent employer do if a candidate is subject to a restrictive covenant?

1.  Ask the candidate during the interview

An employer needs to incorporate into its recruiting and hiring process a procedure to determine whether a candidate is subject to a restrictive covenant. This can be accomplished during the interview process by simply asking the candidate if he or she is subject to a restrictive covenant. The restrictive covenant could be contained in documents other than an employment contract, such as stock option plans and bonus plans. As a result, make sure you ask the right questions.

2.  Obtain a copy of the restrictive covenant

If the candidate says that he or she has signed an employment agreement, or some other contract that contains restrictive covenants, you should do the following:

  • Ask for a copy of the restrictive covenant;
  • Read it; and
  • Review it with legal counsel.

Just because a candidate signed a restrictive covenant does not necessarily mean that it is enforceable or that it even applies to your company or the position offered.

3.  Require that the candidate sign certifications

If the candidate replies that he or she is not subject to a noncompete agreement, the hiring employer should require the candidate to sign a representation that he or she is not subject to any restriction on competition or other contractual limitation on his or her ability to do the job. An employer may want to consider attaching such a document to its job application. In addition, to protect itself, an employer should require the new hire to sign a certification that he or she will not use the confidential information of a former employer.

The last thing you want is for the former employer to bring an action for theft of trade secrets under the DTSA because you knew that the new hire acquired the information by improper means. As the new employer, you should very clearly communicate to the new hire that if he or she is misusing that information, disciplinary procedures will take place which can include termination.

4. Be creative

Even if the new hire is subject to a restrictive covenant, the employer could implement certain measures to avoid being exposed to a legal action by the former employer. For instance, the employer could offer a different position so that the individual is working in a capacity that would not violate the terms of the agreement. An employer could also pay the new hire for the duration of the restrictive covenant, and not have him or her actually start working until the time period concludes. However, this could be a very costly option for some employers, especially for a start-up.

Check out XpertHR’s How To Hire an Employee Subject to a Noncompete Agreement for further step-by-step guidance.

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