What is the appropriate course of action
when a candidate works for a competitor?
With any key hiring decision, time and analysis are needed to identify risks
and exposures and to determine the proper control and mitigation methods.
By Sarah J. Warhaftig, J.D., CRM
You’re the owner of a regional brokerage that presently enjoys a strong share of the market due to certain product offerings that your competitors do not have.
You are looking to fill a key position in senior management. There’s a certain candidate, employed by a competitor, that you have been considering but you are aware that he changes jobs every 36 months or so. He has already worked for three of your toughest competitors, and you have noticed the market mix shifting over the course of time.
What is the appropriate course of action?
As with any significant hire, you need to do your due diligence investigation of the candidate. In addition to those areas you may legally ask about during an interview—work history, education, credentials, etc.—you should also consider a background check. This will include criminal and credit history, driving records, and some financial information. Typically, medical history is not included.
The requirements for conducting background checks vary by state as well. Use of a third-party service should transfer the compliance risks in terms of state, federal and local laws. There are two important caveats about the use of the background check: Employers may not discriminate against a candidate based upon the information obtained, and the results must be kept confidential.
Assuming you are satisfied with the results, what are the risks in hiring him? Are these risks specific to him? To anyone?
This individual will become privy to your confidential and proprietary information—your intellectual property. In particular, he will have access to those product refinements that differentiate you from your competitors.
Perhaps you are concerned that there is some correlation between market changes and this individual’s change of employers. You know that, ethically, you cannot and must not ask him to divulge what he has learned from your competitors or whether he has shared that information with each new employer.
Your prospective new employee may be legally prevented from working for you under the terms of a non-complete clause or a non-solicitation clause in his present employment agreement. The hiring itself may bring a lawsuit to your door. His present employer may claim that you have “poached” him in violation of employment termination clauses or covenants and encouraged him in breaching his contract terms.
Last year saw a number of poaching lawsuits between insurance brokerages. For example:
- Willis Towers Watson PLC (WTW) sued Alliant Insurance Services, Inc., charging that a just-retired Willis official encouraged seven of the employees whom he supervised to join him at Alliant in violation of the restrictive covenants in their employment contracts.
- Lockton Companies, LLC sued Willis units and two of its former producers, charging the producers who they claimed broke termination agreements when they resigned to join the rival brokerage.
- USI sought a temporary restraining order and preliminary injunction stopping Alliant from encouraging USI employees to breach 60-day notice periods, required by the restrictive covenants in their employment agreements.
- AssuredPartners, Inc., filed suit against Alliant Insurance Services, Inc., for hiring an agribusiness brokerage leader and four associates. The suit alleged that the defendants breached their restrictive covenants agreements by attempting to solicit business from AssuredPartners’ clients.
- There is bound to be public outcry from the competitor you take him from. The cases above were, and still are, widely reported. Your company risks damage to its reputation and loss of goodwill in the marketplace. This could affect the buying habits of your customers leading to a reduced market share and diminished revenues.
How will you manage the risks of this hiring decision?
If you haven’t already incorporated restrictive covenants in your employment contracts, now is the time to do so.
- Non-compete and non-solicitation agreements
A non-compete agreement is between an employer and an employee, which states that the employee will not work for a competitor for a certain length of time after their employment ends. You may wish to have the new employee sign one as a requirement for employment. Be aware that enforceability varies by state and jurisdiction.
Some general tests for enforceability of non-compete agreements are:
- The non-compete must have a reasonable duration. What is “reasonable” will depend on the circumstances. A two-year period is typical.
- The non-compete must be reasonable in its scope. The most common limitation is geographic, e.g., within so many miles of the current employer.
- The non-compete must not unreasonably burden the employee’s ability to earn a living in his current profession.
To muddy the waters, on April 23, 2024, the Federal Trade Commission (FTC) voted to ban non-compete agreements. The FTC’s ban forbids any restrictions that have the effect of prohibiting a worker from seeking or accepting competitive employment. The next day, The U.S Chamber of Commerce brought a legal challenge to the FTC’s ruling arguing that the regulator exceeded its statutory authority and the rule should be vacated. Thus, the viability of the legislation remains untested. The FTC did mention that other forms of protective agreements such as non-disclosure agreements were a better alternative to the non-compete.
Unlike non-compete agreements, non-solicitation agreements primarily focus on preventing the poaching of employees, clients, or customers; they are generally enforceable. The agreement should clearly indicate the nature of the restrictions. It could include employees, clients, business associates, or other parties. Like the non-compete, it should have a reasonable duration.
Non-disclosure agreements
A non-disclosure agreement (NDA) is a legal contract between two parties where one shares sensitive information and the other party promises to keep it confidential. The information could be sensitive, technical, commercial, or valuable in nature and often involves trade secrets or proprietary information.
A non-mutual NDA is usually applied to new employees who have access to sensitive and confidential information. The employee is the only party signing the agreement and is prevented from disclosing confidential information. Enforceability of NDAs varies by state; many have adopted specific forms for use. To be enforceable, the confidential information must be clearly defined and the term must be stated.
Going back to the potential hire, what if your new employee breaches the terms of these agreements? What if he shares your confidential information with others? The breach may cause significant financial losses to your company. Yes, you have a breach of contract lawsuit available to you, but will you be able to recoup your losses?
Chances are that the breaching employee will not have the resources to make your company whole. You may be forced to pursue his current employer for encouraging him to breach the terms of his employment agreement with you.
Perhaps you can strategize a way to create incentives for the candidate to remain with and be loyal to your company. If you can determine why he changes employers frequently you may be able to ensure that he does not jump ship by addressing those issues. Is he looking for challenges? Is he bored? Has he not found a culture match?
If the reason is financial, you could consider performance-based incentives or even stock options, though they are not a guarantee of continued loyalty or retention.
Essentially, you must assess your risk appetite and risk-taking ability in this situation. Are you willing to take the risks associated with hiring this candidate? Does he bring knowledge and expertise that outweigh the potential for loss? How critical is the position to your company? Is this candidate the only option you have? What about promotion from within?
A trusted current employee is already part of the company culture and is a known and dependable asset. Yes, there will be some ramp-up time for a new position but the risks to the company may be less in taking that course of action.
With any key hiring decision, time and analysis are needed to identify risks and exposures and to determine the proper control and mitigation methods. Managing the risks associated with that decision requires careful planning and creative strategy. As always, the risk versus reward balance is forefront in the decision-making process.
The author
Sarah J. Warhaftig, J.D., CRM, is the academic director of risk management programs at Risk & Insurance Education Alliance. She is a graduate of Tulane University and Rutgers Law School. Sarah has served as a faculty member for Certified Risk Manager designation programs for over 20 years.