Tuesday 23 July 2019
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Reduce Risk When Hiring Employees From a Competitor

Brian K. Cressman is an associate at MacDonald Illig. His practice focuses on a range of areas including Business Transactions, School Law, Real Estate, Estate Planning and Litigation Support. Cressman received his Bachelor’s Degree in Economics from the Pennsylvania State University, and his Juris Doctor from the Pennsylvania State University Dickinson School of Law.

Whether it’s a superstar salesperson, a key manager or a trusted senior adviser, employees are often the most important asset to a business. Employees don’t just represent a significant investment of time and money, but also trust, since they often have access to an employer’s confidential information. Due to these factors, employers routinely take measures to restrict the mobility of their employees and to protect valuable confidential information when an employee separates from employment.

Typically, employers protect themselves at hiring by requiring new employees to agree to restrictive covenants as a condition of employment. Common restrictive covenants include: non-compete, non-solicitation, non-hiring and confidentiality restrictions. Additionally, an employer’s confidential trade secrets are protected from misappropriation by the Defend Trade Secrets Act and the Pennsylvania Uniform Trade Secrets Act.

If a former employee violates any of these restrictive covenants, the former employer has a clear right to file claims against the employee. However, a former employee’s violation of these restrictive covenants may also expose the new employer to liability.

Depending on the circumstances, a former employer could bring a number of claims against a new employer, including: tortious interference with contract, unfair competition, misappropriation of trade secrets or vicarious liability for the acts of its employee. Due to the potential liability arising from routine contractual protections, particularly in a geographic area or industry with a concentrated labor pool, employers should be proactive to reduce risk when hiring a current or former employee of a competitor. Actions that an employer can take to mitigate risk include:

1. Avoid Violations During the Interview Process. Solicit applicants based on an individual’s skills and abilities, not inside industry knowledge or prior experience in an identical position. Attempt to determine whether an applicant is subject to restrictive covenants, but avoid asking questions that call for confidential information.

2. Require Full Disclosure.
Require that applicants disclose copies of all restrictive covenants by which they are bound and review with legal counsel.

3. Assess the Likelihood of Litigation Before Hiring. Consider the circumstances surrounding an applicant’s separation from, and relationship with, the former employer. On the basis of these circumstances, assess whether the former employer would likely file suit to enforce its restrictive covenants.

4. Implement a Policy. Adopt a company policy respecting the rights of third parties. The policy should expressly state that the company respects the contractual rights of former employers and does not tolerate violations of third-party restrictive covenants.

5. Obtain Written Protections. At hiring, obtain a signed acknowledgment from the employee regarding the company’s policy with respect to rights of former employers, and that the company will not defend or indemnify the employee for violations of third-party restrictive covenants. If the employee is not “at will,” then include a provision in the employee’s contract clarifying that the employee’s violation of a third-party restrictive covenant is cause for termination.

6. Implement an Ethical Wall. If the employee’s work for your company would cause a conflict of interest, screen the employee from the conflict. For example, if an employee is subject to a non-solicitation provision and a customer of his former employer independently comes to your company, the best practice would be to screen that employee from any contact with the customer or with other employees that work with the customer.

Although most employers implement restrictions to protect themselves when an employee leaves, rarely do employers implement procedures to reduce the risk from hiring an employee subject to restrictive covenants. However, the steps outlined above provide a roadmap for employers to detour around costly litigation when hiring employees from a competitor by prospectively taking steps to reduce risk.

For more information, contact Brian Cressman at 814/870-7702 or