What Is A Non-Poach Agreement?
What is a Non-Poach Agreement?
As the name implies, non-poach agreements work to separate one company from another by prohibiting each from hiring the other’s employees. In practice, this is usually accomplished through a highly formalized written agreement, but the concept itself is basic. In these instances, one company essentially says to another, "If you will refrain from hiring any of my personnel, I will refrain from hiring any of yours." These arrangements can be bilateral, but more commonly can also be unilateral, meaning that only one of the companies is restricted from hiring employees until a future date.
In enacting non-poaching agreements, it is critical for management to exercise proper and effective due diligence . Failure to do so can subject the company to numerous liability issues. First, even simple non-poach arrangements are subject to complex contractual rules and regulations. Affected companies should always proceed with caution, and in doubt, they should not act without legal guidance. According to the Department of Justice’s Antitrust Division, non-poaching agreements can impact and disrupt fairly competitive marketplaces. In fact, under certain circumstances, these agreements can promote higher salaries, lower unemployment rates and better overall products and services. Others, however, do not serve the same productive purpose. Such actions include attempts to undermine rivals by prohibiting the employment of key personnel, ultimately reducing competition.
Non-Poach Agreements: The Legal Context
Courts have long recognized that a legitimate interest may exist to protect the goodwill and customer relationships obtained through the training or investment in employees or to otherwise prevent unfair competition. Non-potentially restrictive non-compete, non-solicit and non-piracy agreements may exist to protect an employer’s legitimate interests in its business with customers and/or protecting recruitment costs.
However, the application as well as the enforcement of a non-poach agreement varies by state. The requirements of a non-compete agreement in one state are not necessarily the same as in another state. Non-compete agreements are generally governed by state law. As a general rule, the United States has much more freedom to impose restrictions on employment than is found in many other countries. Notwithstanding that fact, employee restraints are closely scrutinized and held to be void in some states if found to be excessive. Courts in some states are more flexible in applying the "reasonableness" doctrine, while others consider them to be invalid and of no legal effect.
For example, California has outlawed non-compete agreements related to employment agreements. In California, employee non-compete agreements are not enforceable. Under section 16600 of California’s Business and Professions Code, a former employee cannot be prevented from working for a competitor. Non-compete agreements are viewed as anticompetitive and are generally void under California labor law. The court noted that the California legislature created exceptions to the rule, such as the buyout of a partnership or sale of a sole proprietorship. A statute of limitations for enforcement of non-compete agreements also applies. In California, the statute of limitations applies to actions for injunctions limiting employment in restraint of trade. That statute of limitation is four years.
To overcome the implication that non-compete agreements are invalid, California courts have a strict interpretation of the legitimate business interests involved. For example, trade secrets are a legitimate business interest that is protectable. In Metal Services Co. v. Metabo Tools International, Inc., the court noted that there is great deference to employers to determine the scope of their customer relationships and that customers with loyalty to an employer should not be easily swayed away from the employer’s trade and business. Employers should thus be aware that the legitimate business interest relied upon to support an otherwise restrictive covenant may ultimately be scrutinized by the courts.
The Positives and Negatives
Non-poach agreements are not without their benefits. Most fundamentally, by entering into an agreement not to poach between themselves, employers can reduce competition for certain types of employees in favor of potential focus on their product or other offerings. In addition, some agreements may allow an employer to obtain an agreement in one transaction (that deals with numerous jobs and/or businesses) that could otherwise be difficult to obtain because, in a given transaction, an employee may have a relatively low salary but be strategically critical to the company’s operation, or because a particular employee has knowledge regarding a trade secret or specific prospective client that the buyer sufficiently desires to divert from the seller. Additionally, sometimes the peripheral employees to a deal – an employee whose termination will not impact the transaction – benefit from these agreements because his or her threats to leave may be countered by payments to remain and work for the employer on behalf of the buyer. That said, many of these benefits that were previously risked by the employee may now be at the forefront of non-poach agreements, as non-poach agreements have become more common as a result of employee mobility, and companies have developed relationships with employees that they wish to retain.
But such agreements are also criticized. Critics note that non-poach agreements reduce employee mobility and limit their employment opportunities. This is particularly so during periods when the economy is slow and employees who might be more amenable to mobility would seek security through their non-competes. There are broader social concerns, as well, because such agreements can have a significant impact on the lives of employees who are excluded from the furtherance of their careers, and, for that matter, the employees’ families.
Recent Cases and Controlling Precedent
The use of non-poach agreements and their enforcement have been the subject of a number of recent cases, which are discussed below.
Hernandez v. Conriv Realty Associates, LLC
In the Hernandez case, the plaintiff alleged that the defendant, much like many employers, had a policy of never poaching another company’s employees. The court, however, found that the allegations were insufficient to state a claim because merely having a policy of not hiring at a competing business is not a per se violation of antitrust law. The court held that while "a company might not have a policy of hiring at competing businesses, it will not be possible to tell whether the policy has the purpose or effect of unreasonably restraining trade until a full factual record is developed."
Southland Sod Farms v. Stover
Unlike the Hernandez case discussed above, in the Southland Sod Farms case, the plaintiff did allege damage as a result of the violation. The plaintiff alleged that key employees had left to work for a competitor, and that the loss of those employees caused significant damages to the plaintiff. However, the court ultimately found that the non-poach contract clause was no broader than necessary to protect the employer’s legitimate interests.
United States v. DaVita Inc.
The latest case in this area is a 2019 criminal case, United States v. DaVita Inc., in which DaVita Inc. and one of its former vice presidents pleaded guilty to conspiring to not compete with each other’s employees. Dozens of such criminal actions have been filed since 2016. The defendants in this case admitted that in early 2014, DaVita devised an ongoing scheme to restrain trade by entering into a non-poaching agreement with the vice president from a competitor company. Under the agreement, DaVita and the vice president agreed that they would not solicit their respective employees to leave their employment with either company. However, the terms of the agreement between DaVita and the competitor excluded certain managerial and administrative employees from the non-solicitation clause. The court explained that the no-poaching agreement made it more difficult for employees to change jobs, lower wages and benefits, reduce the incentives for job mobility and reduce the frequency of job switching, which are anticompetitive effects that have a significant impact on workers.
How Non-Poach Provisions Work
Companies often begin their non-poach agreements by stating that no party will "intentionally or otherwise solicit, recruit or hire away the respective employees" of the other party. They may also state that no party will "solicit, recruit or hire away from the other party . . . any individual who was employed by the other party, without regard to the method used in soliciting, recruiting or hiring." Many larger companies may have a standard form for non-poach agreements that includes specific provisions dealing with the recruitment and hiring of employees, as well as employees who may subsequently leave one company to join another.
Certain companies require that their representatives "pass" the non-poach agreements, meaning that their agreement binds any employees they recruit or hire. Companies may require each party to provide formal written notice of any offers made to employees of the other party. Non-Poach Agreements can include provisions requiring the parties not to make efforts to persuade former employees of the other party to rejoin their company, as well as to require the parties to revoke any such offers upon receipt of such notice. In addition, non-poach agreements may require that each company provide information about any employee who has left one company and joined the other, as well as the circumstances surrounding the resignation.
Some companies include non-solicitation or non-recruitment provisions that apply where an individual solicits or recruits or is hired for "off-the-street" hires. This provision may be helpful as companies often rely on third-party recruiters to find people to fill either open positions or those that are being created. However , these non-solicitation or non-recruitment provisions may not apply to individuals who were "offered employment based on the submission of unsolicited resumes" or those who simply respond to a request for applications that are "publicly advertised." Certain agreements specify that no company will "accelerate the notice period of an employee of another party that is deactivated from working on the engagement where he or she is deactivated . . . and . . . no permanent offers shall be made to such employees prior to the lapse of a reasonable time after the notice period for such employee has expired."
Other agreements may specify that, without first obtaining the consent of the other party, no company will "engage or procure the engagement of or offer employment to any individual who has provided services to the other party pursuant any arrangement where the individual has had access to confidential information" about the other party. Si the fired individual worked on the engagement during the 12 months immediately preceding the termination of that individual’s employment, a company cannot hire an employee who has access to the other company’s confidential information until the deactivated employee has been gone for 12 months. There may be exceptions to this provision; for example, if the job offer for permanent employment was actually made while the deactivated employee was with the other party and not made on the basis of the inside information the employee had access to while working on the engagement.
No-Poach Agreements may define the term "solicit" to mean "the direct or indirect communication through any means (including telephonic, electronic, written or in-person communications) from one party to any person that encourages that person to pursue employment with that party." As a result, invitations to connect on LinkedIn, for example, could be considered a violation. Solicitation is also defined to include "any communication whereby a party describes the business opportunities available with that party or the prospects of making money with that party and states or appears to state that there is a business opportunity available at a party involving a potential cash return from the prospective employee’s efforts."
Regulatory Oversight and Enforcement
Regulatory Scrutiny and Compliance: Previously the target of antitrust agencies, in recent years non-poach agreements are finding their way into new areas as regulators utilize them in cases across various industries.
Recently, regulatory scrutiny has erupted on this subject, as the FTC and several state attorneys general have challenged non-poaching agreements in both high technology and healthcare industries. At the same time, many companies have been targeted by private plaintiffs filing antitrust claims for their using non-poaching agreements. For example, the District of Colorado recently allowed a suit seeking class certification on behalf of hourly employees at McDonald’s franchise locations to move forward in part on the theory that McDonald’s had an unwritten agreement with other franchises not to hire one another’s employees. Last year, in another case decided in Colorado, the judge initially certified a class of nurses but limited their claims against the companies for hiring travel nurses who were competing for the same pool of nurses. In another case brought by the New Jersey Attorney General against four fast food franchises, the complaint alleged that since 2005 the companies had entered and operated a "deferred compensation agreement," in which if a franchise hired a manager or assistant manager from another franchise, the hiring franchise agreed to pay back half of the manager’s salary to the franchise they were leaving. A series of settlements have also forced franchises to agree not to enter into these types of non-poaching agreements. Since 2018, in addition to those previously mentioned, Skye Co., LLC dba Stone Creek Dining Company, Mimis Café International, Inc. and Burger King, LLC have all also entered into settlements with the State of Washington over salary deferral agreements among franchises.
With the increasing regulatory pressure on companies to avoid non-poaching agreements and the pressure from plaintiffs paying a retainer to litigate, there is now a considerable risk to businesses for entering into these type of agreements.
Non-Poach Alternatives
The government has begun challenging non-poaching agreements through civil suits and criminal subpoenas. So what options are there instead of non-poaching agreements to protect company interests while complying with Department of Justice (DOJ) and Federal Trade Commission (FTC) guidance?
Defend Against Their Use
Even if you do not use non-poaching provisions, you may face companies that do. In the event that occurs, you may have claims for tortious interference with contract and prospective economic advantage as well as unfair competition. This depends on the validity of the restrictive covenant challenged, your business interests that would be harmed by enforcement, and the public policies at stake. Depending on the state, these claims may be easier or harder to establish.
Improve Talent Management
An ongoing talent development pipeline keeps companies competitive, minimizing the effect of talent gaps while attracting new workers. In the long run, that can reduce competition for talent, making non-poaching contracts less valuable to protect against.
Post-Employment Restrictive Covenants
Non-compete covenants can prevent employee poaching without having the same potential antitrust concerns. Other post-employment restrictive covenants, such as non-solicitation of customers/nonsolicitation of employees and nondisclosure/nondissemination covenants, can also be invoked in many cases to reduce poaching risk.
Guarding Competitive Information
Safeguarding trade secrets and confidential information is important. Employing software that tracks and reports access to competitive information and automatically notifies employees when they attempt to copy or download competitive information puts employees on notice that the information is sensitive, shows you care about safeguarding competitive information, and keeps you alerted to potential theft or dissemination of that information.
Retention Incentives
Providing salary , cash, and non-cash incentives for employees to stay is one way to manage salary and other costs associated with turnover. Employment contracts and bonus plans can also be used to encourage employees to stay.
Non-Disclosure Agreements & Confidentiality Policies
Implementing a non-disclosure agreement and employee handbook policy that provides formal notice that employees cannot idle their time away and must remain productive and focused on company issues during work hours is a good way to minimize the ability to be "recruited" at work. Also,,,, visibly posting this policy in common areas of the workplace serves as fair warning that the policy is in place and employees will be held accountable for violation.
Consistent Growth
Regular training and development opportunities give employees a reason to engage in their positions on an ongoing basis. This can also prepare them for potential advancement, which can be a reason for them to lengthen their employment with the company. Having a steady stream of new hires can also eliminate the danger of creating a job market where few opportunities are available.
Hiring More Aggressively
Employees can be tempted to leave for new opportunities elsewhere because it seems like there are none available. Increasing turnover throughout a company by hiring new employees can counter the impression that job growth is stagnant at an organization. Additionally, a faster pace of employee growth can help a business grow more quickly.
Proactive management of your company’s talent pipeline, brand development, and hiring practices improves the company’s internal culture, expands the business’ ability to compete for contracts, and increases your labor pool. Expanding your talent pool by reaching out to more underrepresented communities even increases your diversity and inclusion.