By Joel Henderson and Stephen Acker
Julie is an IT consultant working for NoProblemo! Tech Solutions (NP), a technology consultancy. Julie has worked at NP for six years, is well-educated, and has important certifications and transportable skills. What can NP do to reduce the risk of her being hired away by a client?
The scenario
For the last 18 months, Julie has been assigned to NP’s client, Boxer Motors. It’s a manufacturer that has grown quickly by focusing on its core business and using consultants where it lacked expertise. Julie knows Boxer’s technology intimately.
Boxer realizes that technology is extremely important to its business, and it needs its own dedicated IT department. Boxer has spent a small fortune with NP. During their last weekly call, the operations manager invited Julie to consider making a move: The position of IT manager is open, pays well, and offers more responsibility.
It’s a story not unfamiliar to client-service firms like NP. Every day, these firms put very talented people like Julie in direct contact with clients like Boxer. The employee and client often build a close working relationship, and the employee gains invaluable knowledge of the client’s business.
Reality check
It’s important for client-service firms like NP to be aware of the balance of incentives in every client relationship. They need to consider whether the fees the client is being charged create an incentive to poach. Hiring consultants doesn’t make sense if the same work could be done in-house for less. The client-service firm also needs to check that its employees’ compensation and working conditions won’t drive the best people away.
When Julie leaves NP, it loses her revenue-generating abilities; NP has to recruit and train her replacement; and it loses some if not all of Boxer’s business. Julie’s departure can have serious financial consequences. But before calling the lawyers, NP should undertake that reality check.
Litigating and the defensive alternative
Any decision to litigate should be made after a candid consultation with legal counsel. In cases without any contractual constraints on the employee or the client, the legal fees are likely to outweigh the potential damages award, if any. A defensive approach — using the employment and client-service contracts to prevent poaching — is preferable.
Employment contracts in these industries typically include a nonsolicitation clause. It prohibits the employee from soliciting the business of the employer’s customers after leaving the job for a certain period of time and in a defined geographic area. But such clauses often overlook the problem of an employee defecting to work in-house with a client.
Employment lawyers may be able to draft a nonsolicitation clause that covers accepting employment with your clients, but enforcing these clauses can be difficult. The outcome of any litigation is unpredictable, with courts alert to the imbalance of bargaining power between employer and employee. Courts are reluctant to abridge an individual’s freedom to earn a living.
That’s why the far more reliable route is through the client-service agreement between the service provider and client. The agreement should include a clear prohibition against poaching employees. There should also be financial consequences if the prohibition is breached.
For example, NP’s contract with Boxer could prohibit Boxer from hiring a current NP employee, even for a period after that employee leaves NP. If Boxer hires Julie within that period, it becomes liable to pay NP a certain amount. This should be an amount that will both deter poaching and adequately compensate NP for any defection.
Carefully drafted by counsel, such a clause stands a much better chance of being enforceable. The clause should also ensure that any adverse impact on ongoing service obligations to the client isn’t used as an excuse by the client to avoid paying.
Blessing in disguise?
NP, however, should make one more reality check before it tries to enforce the anti-poaching clause. Is it such a bad thing that Julie now works at Boxer? Often an ex-employee can strengthen the client relationship with their new firm. When Julie, as IT manager, encounters problems beyond her knowledge, is low on support staff, or is considering outsourcing some work, she will look at NP as well as its competitors. She knows NP’s capabilities. If she has fond memories, that could be enough of an edge.
Poaching in all these situations can be tricky to deal with, and to make the best of a bad situation or to keep it from worsening, employers in NP-like shoes should stay calm and seek expert advice.