Recently, a company paid more than $10,000 in legal fees and expended a month haggling to resolve an employment problem that had taken less than 30 minutes to create.
The issue was the hiring of an individual with strong industry experience who was formerly employed by a competitor. However, he was bound by a restrictive covenant with his former employer, effectively prohibiting him from taking the new position.
The employee, eager to begin the new job, failed to inform the new employer. The new employer, in its haste to get the prospect on board, failed to ask the right questions and perform due diligence investigations during the interview process.
As a result, the former employer took legal action, interrupting and distracting the new company’s business until an expensive solution was reached. It was an avoidable and frustrating waste of time and money for the company.
This scenario is not unusual for small and medium-sized entrepreneurial businesses that do not have a professional human resources staff. As a result, this type of problem occurs with troubling frequency.
Here are some guidelines for properly conducting pre-employment investigations and asking the right questions.
First, obtain a thorough prior employment history. If the employee had several jobs within the last two or three years, get information regarding each applicable employer, not just the most recent. A covenant can run for two or three years, and five-year covenants are not unheard of.
Ask the prospective employee if he or she has ever been subject to a restrictive. If the employee was subject to a restrictive covenant, request the employment agreement/contract.
Sometimes, however, because of confidentiality clauses within the employment agreement, the employee may not be at liberty to provide it. In that situation, one alternative is to ask the employee to seek independent legal advice. The lawyer can then represent to the new employer that there is not a restrictive covenant or that it does not apply to the proposed position.
A final alternative is to ask the employee to sign a document representing that he or she is not subject to a restrictive covenant. This would provide that if you are subject to litigation because the employee is bound by a restrictive covenant, the employee indemnifies you for any damages as a result.
Asking the employee to seek independent legal counsel and pay damages uncovered by the employer assure that you will not be in violation of the restrictive covenant. It provides a very strong defense against any prior employer suing the company for tortious interference with the pre-existing business arrangement.
While potentially expensive for the employee, these steps are in his or her best interest because they assure you that the individual is carrying no unwanted baggage.
By following these steps, businesses can move aggressively on hiring leading employees while protecting themselves and adding to their competitive advantage. Michael G. Wiethorn is a partner and small business adviser with the Pittsburgh office of Fox Rothschild, a firm with more than 250 lawyers in eight regional offices in Pennsylvania, New Jersey and Delaware. For more information, visit www.foxrothschild.com.
