Employee “poaching” is a fact of life in many industries. Such employee recruiting is not intrinsically illegal; as a matter of public policy, the law generally favors the ability of employees to freely switch employers. However, there are steps that companies can take to reduce the likelihood of poaching.
Employee “poaching” is a fact of life in many industries...
In a hot tech market, it is often larger, more established companies that are the subject of poaching by startups that can offer a less structured work environment and stock options with greater appreciation potential. Just this August, The New York Times published an article about Unicorns (startups with valuations north of $1 billion) stalking the employees of Google and other established Silicon Valley tech companies.
Recently, however, there have been several high-profile cases of large companies standing accused of poaching employees from startups. In the last year, for example, Apple was sued for poaching by one company (A123 Systems) and the CEO of a second company (Mission Motorcycles) blamed its bankruptcy on Apple’s poaching of its top engineers. If there is any significant contraction in the venture space, the flight to the safety of large tech companies is only likely to accelerate.
The tech community is very small and if word spreads that your company aggressively seeks to prevent employee mobility, it could hurt your future recruiting...
Before outlining the tools available to startups, it is important to note that taking legal action to prevent poaching is a very serious step. The tech community is very small and if word spreads that your company aggressively seeks to prevent employee mobility, it could hurt your future recruiting. Such action should be limited to scenarios in which the target is a key employee or an entire team, or you feel it is essential for the sake of deterrence to send a message to the broader team that you will enforce all of your legal rights in poaching situations.
The first step in combatting poaching is understanding your agreements with your employees. Specifically, is compensation structured to incentivize employee retention and do the agreements contain non-compete/non-solicitation provisions?
Compensation has three potential levers for combatting poaching:
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Salary/Bonuses/Benefits – for key employees this is the time to verify that compensation is at or above market. In a hot tech market, salary/bonuses/benefits have been increasing. You want to make sure you have kept pace.
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Options or Other Equity Grants – make sure that all grants have a vesting period. Most common is a four-year vesting, with the first vesting of 25% occurring at the end of year one. Equally important is refreshing option grants for long-term employees. If an employee is more than 50% vested, the amount they are “leaving on the table” by departing grows less and less significant. At that point, consider new grants with their own four-year vesting clock.
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Stay Bonuses – structure a bonus plan that rewards longevity. Such a plan should be structured in close consultation with counsel to avoid deferred compensation issues under Section 409A of the Tax Code.
If your employment agreements do not already do so, you need to strongly consider asking your employees to sign non-competition agreements. Non-compete provisions limit the ability of an employee to join a competitor for a defined period of time and in a defined geography in order for you to protect your confidential information from being transferred to a competitor via your departing employee. Since the law does not want to prevent people from working, counsel should be consulted to make sure that the non-compete clause is not too broad that it goes beyond protecting your proprietary business information. If the non-compete clause is too broad, a court may narrow it or strike it entirely. In fact, in California, non-compete clauses are unenforceable and in other states there are limitations on their enforceability. In most cases, the non-compete period should not exceed a year, should have a definition of a “competitor” that is narrowly tailored to your business and is limited to geographies in which your company is active.
If the non-compete clause is too broad, a court may narrow it or strike it entirely.
Non-compete provisions are frequently coupled with non-solicitation clauses that prevent departing employees from recruiting employees from their former employer and approaching customers of the former employer with sales opportunities. Non-solicitation provisions are much more easily enforced, and your employment agreements should absolutely include these provisions, if they do not do so already. If you are introducing a non-compete or non-solicitation agreement to an existing employee, you should consult with counsel to make sure that the documentation clearly reflects the consideration the employee has received in return for becoming subject to these restrictions.
When you try to enforce a non-compete/non-solicitation clause, typically you would send a letter to the (potential) new employer highlighting that their new hire is subject to a contractual provision that would be violated by their transfer to the new employer. If that does not prevent the transfer, you may seek enforcement through the courts. If you can prove the claim, the employee would be liable for breach of contract and the new employer may be liable for interfering with your agreement with the employee. Keep in mind, that such legal action is likely to damage your relationship with the employee. Such an employee may not return to work for you and your legal action may only serve to deter future poaching.
Finally, if you cannot prove breach of a non-compete provision or you are in a state where it will not be enforced, you may try to stop the poaching under the doctrine of “inevitable disclosure.” Although not accepted in all states, under this doctrine an employer argues that the employee will not be able to do his new job without disclosing confidential information learned from the original employer. Since the employee is usually bound by non-disclosure obligations, this would result in a breach by the employee of his/her confidentiality obligations to the original employer.
One final word: employment law is very localized. This article is based on U.S. law generally, but it is important to consult with counsel in the state of employment. Such consultation becomes even more important when the employee is employed outside the U.S.
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[Dror Futter is a partner of law firm McCarter & English. He brings more than 20 years of high tech and intellectual property legal and business experience to the firm and its clients. Among other things, he has been General Counsel of Vidyo, Inc., one of the nation’s top 50 venture-backed companies, and General Counsel of renowned venture capital fund New Venture Partners LLC. John P. Quirke, also a partner at McCarter & English - where he focuses on employment and labor law as well as trade secret protection - served as contributing editor for this article.]
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