No one knows the challenges of recruiting better than staffing firms. And the tight labor market makes finding the right people — and keeping them — that much more difficult. In search of the best candidate, companies sometimes will approach top performers at direct competitors.
Some call this type of recruitment “employee poaching.” It’s not illegal, but there can be questions about noncompete agreements, and whether the worker may be bringing proprietary data from the other firm with them.
“Alleged violations of agreements not to compete and unfair competition are a frequent basis for lawsuits among staffing firms,” says Neil Alexander, a shareholder in employment law firm Littler Mendelson.
Many of the lawsuits over noncompete agreements are enforcement actions lodged by larger staffing firms against small groups of internal workers that break away to start their own business or go to a direct competitor, Alexander says. Sometimes a manager will join a competitor and, armed with knowledge about his or her former team members’ salaries, begin hiring them away.
To combat poaching, some companies — notably in the technology industry — have agreed among themselves not to recruit from one another. Such agreements, however, run afoul of the law and can bring expensive consequences — as some large technology industry firms found out $415 million later. Poaching of internal workers refers to one staffing firm enticing a worker from a direct competitor to leave and work for the new firm doing essentially the same type of work.
In a separate but related category, temporary workers can also be targeted for poaching in a strategy called “tempnapping.” Tempnapping occurs when a client company attempts to move contingent workers supplied by one staffing company to another staffing company. Often, it happens as a cost-cutting move by the client when the receiving staffing firm strikes a deal to offer the client a lower rate.
Prevention
“You can’t go to school and get a degree in contract staffing,” says Monte Block, CEO of Rotator Staffing Services Inc. “So, poaching and taking from your competitors has always been a problem.”
Strategies to stop internal staff from being enticed away include making sure they are paid well and having noncompete agreements in place where allowed, Block says. In particular, you want to overpay your superstar performers.
“I try to pay my superstars well and give my average people an opportunity to be a superstar,” he says. As for the people who leave? “I wish them luck in most situations as long as they don’t steal from my company.”
Often, internal workers leaving for a larger paycheck have only a small window of time to perform, Block says. They might have only six months to deliver what the other firms feel they are paying for. As a result, about half the internal workers he has seen leave for a competitor also leave the new company in short order.
“If they’re giving them that much money, they are going to have to perform and perform fast,” he says.
Formal agreements. Noncompete agreements can prohibit a worker from going to a competitor and doing the exact same type of job for a specified period of time. However, not all states allow them — those that don’t include California, Nebraska and North Dakota.
There’s another catch.
“Unless you actually lose customers, there are no damages in the lawsuits,” Littler Mendelson’s Alexander says. The suit would be about the principle of the matter, and could just result in an injunction against the former employees from breaking their agreements.
And where companies are most successful in enforcing these contracts against new companies is when the worker improperly takes with them information from the old firm.
“When people take what is clearly proprietary information, they are in trouble,” Alexander says. For example, when a worker takes information on pricing and uses it to undercut a bid for staffing at a client.
Noncompete agreements must also be about protecting business goodwill, not reducing competition. And a year-long noncompete in most states is pushing the envelope, Alexander says. They also have to be reasonable — for example, six months long and covering the exact same kind of job and having a reasonable geographic scope. The noncompete agreement must also be disclosed in advance; a company shouldn’t just spring it on employees on the first day of the job.
But when it comes to temporary workers, a noncompete contract is more difficult, he says. It’s inconsistent with the value proposition, and a temporary worker is not likely to have confidential information that will disadvantage you if he or she go to another agency.
If a noncompete agreement goes to court, the litigation is very fact-intensive, varying by the case, says Joel Klarreich, a partner with the law firm Tannenbaum, Helpern, Syracuse and Hirschtritt.
There are also differences in how courts approach noncompete agreements, even among states that do allow them. Klarreich says New York state courts tend to treat noncompete agreements as unenforceable unless there’s a reason to enforce them, but federal courts located across the street take the opposite approach.
Still, a contract is key.
“Most staffing firms have some sort of agreement in place with their internal people that restricts their employment or activities post termination if they go to a competitor,” he says.
And even then, relationships still matter, says Steve Drexel, president and CEO of Cornerstone Staffing Solutions Inc.
“Beyond contracts, the only thing you can try to do is have the right kind of environment and the right kind of relationship with your employees,” Drexel says.
He adds that he has seen his recruiters go not so much to other staffing firms, but become corporate recruiters at large tech firms such as Google or Facebook. Cornerstone itself is based in the San Francisco Bay Area. Such moves can actually turn into a positive and be used as a way to attract new recruiters to the staffing firm, touting the fact that they could, after a reasonable period, have a chance to move into one of the large technology players.
Costly Consequences
Even the large tech firms struggle with poaching of their workers, but not all their methods of combatting it have gone over well. Several large tech firms, including Apple and Google, agreed to pay a $415 million settlement in 2015 over an agreement the firms had struck among themselves to not recruit employees away from one another. Their explicit anti-poach agreement had run afoul of the law.
Eric Rumbaugh, a partner at Michael Best & Friedrich LLP, says such no-poach agreements can also lead to criminal proceedings for the executives involved.
“The Obama Department of Justice issued enforcement guidance taking the position that corp-to-corp no-poach agreements aren’t just invalid, they may be criminal,” Rumbaugh says. And that position was upheld by President Trump’s Department of Justice.
Staffing firms in some cases can have nonsolicitation agreements where a worker agrees not to recruit fellow workers if he or she moves to a new firm, although the workers from the former firm can still be hired by the new one. No-hire agreements prohibit any hiring at all of former colleagues by the worker at the new firm.
These types of contracts are allowable in some states, but not others, Rumbaugh says. And there’s a trend in courts where nonsolicitation agreements are not favored and no-hire agreements are even less favored. Recent California and Wisconsin cases, for instance, invalidated many employee nonsolicitation agreements. When looking at such contracts, it’s best to speak with an attorney.
Rumbaugh says, in general, it’s legal for companies to recruit from their competitors or even target competitors for recruitment.
“Businesses don’t like having their employees poached, but as a general matter it’s legal to poach,” Rumbaugh says. “The front-
door solution is pay people more or treat them better. The law generally doesn’t like businesses trying to use contracts to keep people from moving.”
Client-Driven Tempnapping
When a client attempts to replace a staffing vendor — and transition the temporary workers from the old staffing firm to the new one — a contract is also key, says Janette Levey Frisch, an employment attorney who also works with staffing companies.
“There won’t be any recourse for them in most cases if their contract doesn’t address that,” Levey Frisch says.
Staffing firms need a contract clause spelling out a fee if temporary workers — in whom they invested the time and resources to find and screen — are transferred to another firm.
On the other hand, putting such contract language in place can be easier said than done.
Levey Frisch says some clients, especially large companies, use their own contracts that allow for the assigning of temporary workers to another staffing firm. And the large clients can be unwilling to alter their standard contract — it’s take it or leave it.
Staffing firms need to ask themselves whether they want to do business with a company that would entertain such unethical behavior.
Still, some staffing firms may not feel they are in a position to turn away a large client. In that case, they might try to build their costs into the contract knowing that the contingents will eventually go to another firm, she says. Or they could weigh how long before the client is likely to move the temps and whether they will be in place long enough to make a profit.
Sometimes a large client won’t entertain contract changes because that would mean going back through its legal department, which can be a black hole and take a long time, Levey Frisch notes. If that is an issue, it can be taken into account in negotiations. Of course, not every legal department takes a long time, but large companies tend to do things more slowly and have more bureaucracy.
Even in the case of an agreement, enforcing it may mean a lawsuit.
“That’s not what you want, but it’s better than having no recourse at all,” she says.
By the code. The American Staffing Association has a code of ethics and good practices that covers what happens when a new firm takes over, notes Klarreich of Tannenbaum, Helpern, Syracuse and Hirschtritt.
ASA’s code calls for the outgoing firm to be given reasonable prior notice that the account is being transferred and employees should be given a reasonable amount of time to work on the payroll of the outgoing firm as part of a transition period. Employees should also be given the choice of accepting a new assignment at another client with the outgoing firm.
On a note of caution, sometimes clients will insert language that looks innocuous on the surface — for example, “staffing firm agrees to assist the client in transition of the work” — but might allow for moving temps to another staffing firm, Klarreich says. It’s language that an attorney would recognize, but not necessarily a layperson.
“Definitely look at the contract and try to protect yourself accordingly,” he says.
Hurting the Temp. Tempnapping is not just bad for staffing firms, but some say it can be bad for temporary workers as well. For example, they may have benefits through the old firm but not the new one. They may also have a relationship with the old firm and be unhappy with a move.
Many also feel it’s not a model for ethical business behavior.
Rotator Staffing’s Block says in one case a new MSP came on board at a client and set a fee of 8% for staffing firms, up from the 2% fee charged by the previous MSP. Once the MSP’s higher fee was refused, there was an effort to get the temporary workers employed by another staffing supplier. Temps had to be pulled from their jobs and reassigned elsewhere.
“We have to, as an industry, endorse the idea that there’s no quick way to make a lot of money,” he says. That includes not stealing people. Many times, the collateral damage is felt by the employee.
“Our best buyer is an educated buyer,” Block says. “If you buy cheap enough, you get nothing.”
Fortunately, most of the clients and staffing firms are ethical, he says. It’s the small percentage that aren’t. And lack of ethics can include more than tempnapping. Other questionable legal and ethical tactics include separate issues such as improper per diems, paying workers under the table, paying straight time for overtime and misclassifying workers as independent contractors.
“At the end of the day you get caught,” Block says. “And it’s a shame because there are a lot of great, ethical business people out there.”
