Risks to the Employer in Hiring Someone with a Non-competition Agreement
Jeffrey R. Teeters, Partner, Wood + Lamping LLP
The impact on a company hiring an employee often gets overlooked in articles written about employee non-competition agreements. The employee might lose a job opportunity, but the potential new employer must be aware of significant financial risks when hiring a person with a non-competition agreement.
Non-competition agreements are in seemingly every industry. A 2016 white paper from the U.S. Department of the Treasury’s Office of Economic Policy reported that approximately 18 percent of all American workers are covered by some form of a non-competition agreement. It also reported that approximately 37 percent of Americans have worked under a non-competition agreement at some point in their careers. The odds are that you will face this issue as an employer.
Most states authorize enforcement of non-competition agreements. That enforcement posture leads to at least two definite risk factors for the hiring company: (1) you may lose the employee if the restrictions are enforced and (2) you may face liability for a variety of potential damages.
A common allegation against the new employer in these situations is that it “intentionally interfered” with the contract between the employee and the prior employer. Cautionary steps will help protect the new employer from this risk, but make no mistake―there is a risk.
An “intentional interference” claim comes into play if a court or jury determines that the new employer knew of the non-competition agreement, the new employer intended to cause or assist the employee in breaching it, those restrictions are actually breached, and the prior employer is damaged by that breach. Given that many employers ask candidates for copies of their prior agreements, the first element of this claim is often not in dispute.
The key element of the claim then comes down to whether the new employer intends to cause or assist the employee to breach the non-competition agreement. Many factors come into play here but the difficulty arises for both sides in proving (or disproving) the new employer’s intent. In this context, it can be hard to explain away evidence that the new employer was concerned about whether the restrictions might be enforceable. Even when you believe you can properly explain the situation, the factual dispute likely will not be resolved until after the investment of many months and much money in the litigation process.
If a judge or jury concludes that the new employer intended to cause the breach, the prior employer can seek actual monetary damages that may have resulted. Then comes the ugly part.
That intent will also permit the prior employer to ask for punitive damages and to have the new employer pay the attorney’s fees incurred by the prior employer to litigate the case. Those numbers could turn a small case into a substantial financial liability in a hurry.
The mere existence of a non-competition agreement should not end the discussion about whether to hire the candidate, but it absolutely should start a discussion about the financial risks that a decision to hire the candidate could bring to the company.