Anti-Raiding Provisions with Clients, Vendors and Subcontractors – Why It’s a Good Idea

Many companies have basic non-compete provisions that prevent employees from working for a competitor for a certain period of time, but they often fail to address a situation where an employee goes to work in-house for a client of the company or jumps ship to work for a vendor, supplier, or a subcontractor of the company. While, technically, such move by an employee may not constitute “competition” with his/her former employer, a lot of times it eliminates a client’s need for the company’s services in the area that is now being covered by the new employee or it otherwise affects the company’s relationship with a vendor or a sub resulting in a reduction of revenue to the company.

One solution to this problem is including an anti-raiding provision in the vendor and client agreements, which states that the vendor/client/sub will not recruit, hire, or solicit the company’s employees.  Of course, a company is always free to waive such restraint for a particularly large client or after it receives assurances that there will be no reduction in business from the employee’s departure, but it will protect the company in all the other situations.

However, just as with other employment covenants, the anti-raiding clause must be clear and reasonable. Just last week, the Fourteenth Court of Appeals in Houston held that a sub-contractor’s anti-raiding clause did not prevent it’s contractor from indirectly employing sub-contractor’s employees.[1]

In this case, LyondellBasell hired Modis (contractor) to provide technical personnel for computer-related projects. Modis, in its turn, hired NetMatrix as a subcontractor. The sub agreement, among other provisions, stated that Modis “shall not recruit, hire or otherwise solicit” NetMatrix’s personnel assigned to the project.

Two years into the sub agreement, one of NetMatrix’s technicians quit and went to work for Millenium – another subcontractor employed by Modis. The technician proceeded to work on the same project for LyondellBassell to which he was assigned while at NetMatrix.

NetMatrix argued that Modis breached the sub agreement’s anti-raiding clause because it allowed NetMatrix’s employee to work for Modis’ other subcontractor and, therefore, it “indirectly hired” the technician in violation of the above clause.

The Court of Appeals disagreed, finding that other employment covenants in the sub agreement prohibited both “direct” and “indirect” activities, but the anti-raiding clause did not address “indirect” hiring. Therefore, it was clear that the parties meant to prohibit only direct hiring, and, consequently, Modis did not violate that clause when it allowed its sub to employ NetMatrix’s employee.

TAKEAWAYS: First, make sure that your vendor, sub, and client agreements have anti-raiding clauses. Second, make sure that the clauses are precise, reasonable, and are consistent with other restraints contained in such agreements. Finally, if you are considering waiving such a clause for a particular employee, make sure that you don’t create a permanent waiver that would render the anti-raiding clause unenforceable in the future.

[1] Although the Court applied Florida law per the parties’ agreement, similar analysis would follow under Texas law as well.

Leiza Dolghih is the founder of Dolghih Law Group PLLC.  She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.