rss icon

Sunday, 15 October 2017 20:00

Breaking ‘paper handcuffs:' Manufacturers search for loopholes to avoid litigation from employee poaching

Written by 
Rate this item
(3 votes)

With availability of talent at a premium, many manufacturers are attempting to lure away key workers from their competitors. 

However, the pursuit of competitors’ workers can land a company in legal trouble. That was the case for Holland-based Koops Inc., a manufacturer of automation equipment, when it hired away an engineer from Byron Center-based E’Mation Controls and Engineering Inc.

Koops, along with employee Mark Ouwinga, are named as defendants in lawsuit brought by E’Mation, which alleged Koops had breached a verbal agreement prohibiting both parties from poaching employees. The lawsuit also alleges Ouwinga violated a noncompete clause he signed at E’Mation in 2011. 

The case made its way through the specialized business docket of the 17th Circuit Court for Kent County. In early September, Judge Christopher Yates ruled in favor of E’Mation’s claims against Ouwinga. At the same time, Yates also ruled in favor of Koops regarding the allegations of employee poaching, citing scant evidence for a verbal agreement. The matter has since moved toward a settlement hearing.

Representatives from both Koops and E’Mation did not respond to requests to comment for this report. 

The lawsuit between the two firms stands out amid an increasing number of legal disputes arising from employers’ pursuit of talent at a time when the labor market is close to full employment. 

“It’s a difficult (labor environment) where companies looking to attract or retain talent are often faced with having to hire away employees of their competitors or their vendors,” said Mark Smith, a partner at Rhoades McKee PC, a Grand Rapids-based law firm. “A lot of times, the key employees (that companies) want to hire are working somewhere and have some form of restrictive covenant in place. Everyone is looking at ways to protect their own workforce, while at the same time looking at ways to poach from others to supplement and maintain their workforce.”

Sources interviewed for this report believe the rise in employee poaching and noncompete agreement-related lawsuits stems from a combination of increased worker mobility, as well as more frequent use of the restrictive employment clauses compared to prior years. 

“You don’t see the person stay with a company for 20 years anymore,” said Luis Avila, a partner specializing in employee litigation with Varnum LLP in Grand Rapids. “They sign because they’re getting a good salary without thinking about the consequences of this one-, two-, sometimes three-year noncompete that will prevent them from doing anything.” 

Avila points to a rise in companies threatening litigation in recent years, but notes many organizations do not follow through on those threats unless they believe the employee has taken trade secrets or confidential information with them. 

According to Avila, the rising number of noncompete cases directly correlates with companies’ more frequent use of the agreements these days.

“You see them a lot more now than you would 15 years ago where they were limited typically toward very key employees, the leadership of a company,” he said. 

That’s changed as some companies have blanketed their staff, regardless of position, with noncompete agreements. For example, the sandwich chain Jimmy John’s drew significant criticism in 2014 for requiring all of its workers, including sandwich-makers, to sign noncompete clauses barring them from working at other sandwich shops. 

The Jimmy John’s case has led some to see noncompete agreements as a barrier to economic growth, as MiBiz previously reported at the time. 

Since then, business courts have started nullifying agreements that go beyond reasonable stipulations, including those based on the employee’s position, the geographies included in the clause, and the active duration of the noncompete after an employee leaves a company. 

AVOIDING LITIGATION 

To avoid issues with noncompete agreements, it’s essential for companies who are hiring to ask as part of the screening process whether prospective employees have signed one of the restrictive documents, sources said. 

“Certainly, the first question they should ask an engineer or management is do they have noncompete in place,” Avila said. “It’s surprising how often that question doesn’t get asked. Then (the company) doesn’t find out until the employee has been around for a few months.”

Still, a company can find ways to work around a prospective employee’s noncompete clause if it’s discovered ahead of time. Many agreements are limited to certain geographies, or limit employees from working in the same capacity at a competitor. 

“There are ways for companies — manufacturers, specifically — to get around those noncompetes so they’re not violating them,” Avila said, noting it’s up to the company’s legal counsel to discover those loopholes. 

On the other hand, for employers who are looking to retain talent, it’s important to enact realistic noncompete agreements that will stand up in court, said Smith of Rhoades McKee. 

“You really have to evaluate: ‘Is this guy the parking lot attendant? If he works for a competitor, he can’t hurt me in anyway,’” he said. “Contrast that with the head of sales and marketing who knows your entire strategic plan and price points for the next year. (If) they get hired away by a competitor, they clearly can do some damage.”

ALTERNATIVES TO NONCOMPETES

While many companies still rely on noncompete agreements to retain employees, some firms are turning to other means of ensuring workers stick around, including student-loan repayment programs. 

In some cases, employers are offering to pay off a new employee’s student loans in full. In return, the company will mandate that the employee signs a promissory note for the amount paid by the company. As part of the promissory note, the company will agree to forgive a certain percentage of the loan balance each year. If an employee leaves the company, he or she is required to repay the balance remaining in the promissory note, under the company’s terms. 

But while a noncompete agreement may be limited to two years, this financial commitment can be in place for a decade, Smith said. 

Companies also are issuing repayable retention bonuses to employees, according to Smith. Such financial rewards are subject to repayment if a worker does not remain at the company for a set period of time. 

“These agreements haven’t been challenged in the courts yet — they’re kind of new,” Smith said. “Where is it going to end up, we don’t quite know, but you can see the attraction in them because they add some financial incentive to stay, as opposed to the paper handcuffs of a noncompete agreement.”

Read 1395 times
John Wiegand

Staff writer

jwiegand@mibiz.com

Breaking News

November 2017
S M T W T F S
29 30 31 1 2 3 4
5 6 7 8 9 10 11
12 13 14 15 16 17 18
19 20 21 22 23 24 25
26 27 28 29 30 1 2

Follow MiBiz