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How to Avoid Liability When Hiring Employees from Competitors

The widening gulf between the job openings and job seekers has made it difficult for companies to find the talent and skills they need to succeed. Turning to your competitor’s employees is far from a new trend. But in some cases, you may be liable despite California law against non-compete agreements.

Signing a non-compete agreement means you agree not to start a competing business or work for a competitor for an explicitly stated amount of time. Non-compete agreements are also called a covenant not to compete. “Covenant” is a fancier word for agreement, so both terms mean the same thing. By signing a non-compete agreement or covenant not to complete, the employee agrees to not work for a competing company or even in a specific trade for a specified period of time after leaving the business.

However, the California Business and Professions Code has considered“job-hopping” an individual right since 1872. And as of January 1, 2017, the California Labor Code was revised to specify that non-compete agreements can’t be required as a condition of employment for all employees, from cashiers to physicians and other high-ranking professionals.

Therefore, non-compete agreements are illegal in the state. This means that an employer can’t require an employee to sign one, and employees are free to take a position with a competing business.

But that doesn’t mean there aren’t specific situations where the company hiring an employee from a competitor could be held liable.

Employers seek non-compete agreements to protect business trade secrets, intellectual property and internal information that employees have knowledge of, in case they share it with a new employer or use it in starting their own competing business.

But they’re not enforce able in court because of California’s employment laws and can open employers up to fines,and employees to compensation if the agreement affected their ability to earn a living.

This doesn’t mean that businesses can’t ask employees to not discuss or share company information. It only means that the request can’t be enforced under California law.

Can an employer ever be liable for hiring away an employee from a competitor?The answer is yes, under specific circumstances.

  1. The new employee brings trade secrets from the former company while working for his new employer. Under California Code, a trade secret is company information:
    • That holds economic value from not being generally known outside the company;
    • Is not information someone could reasonably find out on their own; and
    • Is information the company has made reasonable efforts to keep secret.

Client and customer lists are considered trade secrets in California, if the employee’s former company’s list was kept in digital or written form, was distributed on a “need to know” basis, and the information goes beyond the client’s name but includes data about the client.

  1. The new employee signed a non-solicitation agreement with her former company. While this doesn’t affect you hiring the competitor’s employee, it does mean that your new employee can’t persuade former colleagues to follow in her footsteps.

California law allows for non-solicitation agreements, although it does hold “no hire” agreements — barring a former employee from hiring former colleagues — as illegal.

  1. The employee signed a non-compete agreement with a business incorporated in a different state. Known as a choice of law provision, this means a business headquartered in a state like Arkansas where non-compete agreements are enforceable can require signed agreements from employees who work for the company’s offices in California. California courts will review this provision as a conflict of law, but if the former employee signed the agreement in Arkansas, the non-compete agreement likely will be considered binding.
  2. The employee had a financial business interest in his former company. California law allows someone buying an established business to require a non-compete agreement from the seller, or from a former business partner or member of a limited liability company.

Employment law is filled with complexity and nuance. To make sure you’re not opening your company up to liability when hiring talent from your competition, it pays to seek legal advice. LawPLA specializes in employment law and can guide you through the legal ins and outs of employee hires. Contact us through our website or by telephone for a free consultation today.

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