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Hiring from competitors – what recruiters need to know

The FTC's recent intention to ban non-compete agreements will face numerous legal challenges before any change actually happens. So what do CHROs need to know 'now' if they're hiring from rivals?

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May 30, 2024

In the cutthroat world of business, the quest for top talent often leads companies to consider hiring individuals from competitors.

But while this can be a strategic move for the business, it’s crucial for new employers to tread carefully to avoid potential legal pitfalls.

One significant risk arises when a new employer hires a competitor’s employee or former employee who brings along sensitive information from their previous workplace.

This could include confidential data, proprietary knowledge, or trade secrets. If such information is used improperly, it can land both the new employer and the employee in a litigious dispute.

Another common issue arises when the newly hired individual solicits their former employer’s customers or clients, violating contractual or fiduciary obligations.

Similarly, if the new hire competes directly with their former employer without adhering to contractual obligations, legal repercussions may follow.

The former employer may allege breach of confidence, breach of fiduciary duty (such as misappropriation of corporate opportunity or unfair competition), inducing breach of contract, conspiracy, unlawful interference with economic relations, and even intellectual property rights infringement.

In response, the former employer may seek various remedies from the new employer.

These could include interim, interlocutory, or permanent injunctions to prevent further misuse of confidential information or solicitation of clients.

Additionally, they may demand accounting for profits derived from any improper actions, compensatory damages to cover losses incurred, and even punitive damages to deter similar behavior in the future.

Strategies to minimize legal risks

There are a number of key steps employers can take to minimize legal risks in hiring competitor’s employees:

Conduct interviews carefully:

During the interview process, focus on the candidate’s qualifications and suitability for the position rather than soliciting competitive information.

Avoid questions about the candidate’s current employer’s clients, strategies, or finances.

Remind candidates not to disclose any confidential information from their current employer and instruct them not to use their current employer’s resources for communication during the hiring process.

Waivers for candidates with restrictive covenants:

If a candidate is subject to enforceable restrictive covenants, assess whether the duties of the open position would breach these terms.

If the answer is yes, consider restructuring the role to avoid conflicts or ask the candidate to seek a waiver of restrictions from their former employer.

While obtaining a waiver may be unlikely, especially regarding confidential information and intellectual property, the decision should be left to the candidate.

Offering indemnification:

 To alleviate concerns about potential litigation from their former employer, consider offering indemnification to the candidate.

Indemnification agreements should be used cautiously and exclude coverage for dishonest or fraudulent conduct.

The agreement should also allow modification or termination under appropriate circumstances.

Carefully structure the employment offer:

Employment offer letters often become evidence in litigation, so they should be drafted with a careful eye toward potential legal scrutiny.

Once a decision to hire has been made, refine the offer letter to include specific clauses aimed at minimizing legal risks.

Make employment conditional upon the candidate not misappropriating their former employer’s confidential information, trade secrets, or violating any restrictive covenants.

In conclusion

 By implementing these measures, employers can reduce the likelihood of legal disputes and safeguard their interests when hiring employees from competitors.

In doing so, businesses can focus on leveraging talent to drive success while mitigating legal risks effectively.

Given the complexity and potential consequences of hiring employees from competitors, it’s imperative for new employers to conduct thorough due diligence and seek legal counsel from an employment and business law firm when necessary.

By proactively addressing these risks, companies can mitigate the likelihood of costly litigation and safeguard their reputation in the marketplace.

After all, in the competitive landscape of business, strategic hiring decisions can make all the difference between success and legal entanglements.

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