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May Recruiters Solicit Employees from Clients? Case Law Indicates that Recruiters have no Fiduciary Duty to Clients.

The National Law Journal

October 2, 2006

As the competition for qualified employees becomes more intense, employers often retain recruiters or search firms to help find and recruit new employees. Employers, however, may not realize that the recruiters who are assisting them may also be placing their own employees with other companies. The role of recruiters and the limits on their conduct in soliciting employees from one of their own clients has not yet received extensive judicial attention but should be of growing concern in an increasingly competitive market. This article examines whether and how a company can protect itself from a recruiter that the company has retained.

A company using a recruiter to solicit new employees should be aware that little prevents the recruiter from placing the company's own employees with another company for which the recruiter is also working. The multiple allegiances that recruiters have to any company that retains them leads to the sometimes harsh reality that turnabout is fair play. While it might seem like a conflict of interest for a recruiter to solicit the employees of a company while also seeking to help that company hire new employees, there are few common law limitations on a recruiter's ability to place employees of its own clients at other companies.

No fiduciary relationship

First, recruiters typically do not owe their clients a fiduciary duty, particularly if they are working on a nonexclusive basis. Forum Personnel Inc. v. David J. Greene and Co. LLC, No. 01-402, 2002 WL 424344, at 1 (N.Y. App. Term 1st Dep't March 14, 2002). Even when a recruiter works closely with a company, the recruiter's role is typically to locate and forward potential candidates to the company. The company conducts its own interviews with the candidates, makes the decisions about whom to hire and is not obligated to hire any of the candidates forwarded by the recruiter (although the company may have to pay the recruiter even if it hires a candidate the company locates through other sources).

Since the recruiter's role is limited to finding and presenting candidates to the company and the company conducts its own due diligence by, at least, interviewing the candidates and deciding whether to hire a candidate, the relationship between the recruiter and the company typically does not rise to the level of a fiduciary relationship. Id. at 1; Mount Sinai Med. Ctr. of Greater Miami Inc. v. Heidrick & Struggles Inc., No. 04-13889, 2006 WL 1914587, at 2 (11th Cir. July 12, 2006) (per curiam); see, e.g., Northeast Gen. Corp. v. Wellington Adver. Inc., 624 N.E.2d 129 (N.Y. 1993) (a finder does not owe its client a fiduciary duty since, among other things, the finder's role is to locate and introduce to the client potential targets for acquisition, the finder had no power to negotiate transactions and the client company was capable of, and could perform, its own due diligence).

In Forum Personnel Inc., the plaintiff recruiter successfully placed a candidate with the defendant company. The recruiter subsequently placed the defendant company's own personnel manager with another of the recruiter's clients. As a result, the defendant company refused to pay the recruiter's fee for the original successful placement. The recruiter sued to recover the fee and the company counterclaimed for, among other things, breach of fiduciary duty. The trial court dismissed the company's breach of fiduciary duty counterclaim and granted judgment for the recruiter. On appeal, the New York appellate court affirmed, recognizing that there was no fiduciary relationship between the recruiter and its client company.

Second, while it may seem reasonable to believe that a recruiter that uses its knowledge of a client's organizational or compensation structure to recruit the client's employees has misappropriated confidential information and can be held liable for doing so, such a claim is unlikely to be successful. Initially, a company would need to prove that the recruiter actually used the company's information to solicit the company's employees. Then a company would need to prove that the information the recruiter used was confidential. A number of courts have held that information identifying an employee or the employee's contact information, position, experience and compensation is not confidential. See Lockheed Martin Corp. v. Aatlas Commerce Inc., 725 N.Y.S.2d 722, 725-26 (N.Y. App. Div. 3d Dep't 2001); Unisource Worldwide Inc. v. Carrara, 244 F. Supp. 2d 977, 988 (C.D. Ill. 2003) (applying Illinois law). Thus an employer would need to show that the recruiter relied on something more than basic information about the employees being solicited to prevail on a claim of misappropriation of confidential information.

Third, it is unlikely that a recruiter's placement of a client's employee with another company gives rise to a claim that the recruiter has breached a duty of good faith and fair dealing. While a duty of good faith and fair dealing is implied in most contractual relationships, the recruiter's obligation is limited to presenting candidates to the client. A claim that the recruiter breached its good-faith obligation through conduct unrelated to the recruiter's location and presentation of candidates to the client is unlikely to be successful. See, e.g., Mount Sinai Med. Ctr. of Greater Miami Inc. v. Heidrick & Struggles Inc., 329 F. Supp. 2d 1309 (S.D. Fla. 2004), aff'd 2006 WL 1914587 (11th Cir. 2006) (a recruiter's alleged material misrepresentations of a candidate's career and qualifications could not constitute breach of duty of good faith and fair dealing since the central purpose of the contract was for the recruiter to present candidates to the client so the client could make its hiring decisions and the recruiter's alleged bad acts did not obviate that central purpose).

No one industry standard

With few common law limitations on a recruiter's conduct, there does not appear to be a uniform position within the recruiting industry regarding whether and when a recruiter can place employees of a current or recent client with a different client. For example, the Professional Practice Guidelines of the Association of Executive Search Consultants do not contain any explicit limitation on a recruiter's ability to recruit from a current or recent client. Instead, they state that the recruiter and client should agree "concerning any 'off-limits' restrictions or other related policies that govern when and how the [recruiter] may recruit from the [company] in the future." See www.aesc.org/article/guidelines/. The implication of this guideline is that absent an agreement between the recruiter and client, there are no limits on the recruiter's ability to recruit from the client.

Another industry group, the National Association of Personnel Services, takes the opposite approach, providing that unless otherwise agreed, the recruiter should not recruit other employees from a client except in limited circumstances. The association's Standards and Ethical Practices Guidelines state that "[i]n the absence of an agreement to the contrary, a recruiter shall not attempt to recruit for placement candidates employed by a client company within one year of the most recent placement with that client company at the same location, unless the candidates directly request the recruiter's assistance in seeking new employment." See www.recruitinglife.com/aboutUs/SEPRecruitersClients.cfm.

An industry group for search firms placing lawyers takes another approach. The National Association of Legal Search Consultants' Code of Ethics states that "No search firm shall recruit any attorney from the office of an employer in which it has made a placement for a six-month period following that placement, unless the search firm reasonably believes such a restriction is not required by the employer." See www.nalsc.org/ about/ethics.cfm.

While this restriction may seem to be a broad constraint, it only prevents the recruiter from placing lawyers who work at the particular office of the employer at which the recruiter previously placed a candidate. This is not a significant limitation in today's environment of multioffice law firms. Perhaps more significantly, the prohibition on recruiting from a client does not apply at all if the recruiter "reasonably believes" that the employer does not require this type of restriction. The consultants' code of ethics provides no insight into what this "reasonable belief" should be based on, giving the recruiter a tremendous amount of room to recruit from its current or former clients.

Contracts are the solution

The one common thread between the approaches adopted by these industry groups is a recognition that a contract between the recruiter and client can and should address whether and to what extent the recruiter can recruit from the client. Absent a clear common law duty or strict industry regulation preventing a recruiter from soliciting employees of a company that has retained the recruiter, the best way for a company to protect itself is to ensure that its contract with the recruiter limits or eliminates the recruiter's ability to solicit the company's employees. This practice has found support in case law, where courts have looked to contracts between the recruiter and client to determine the scope of the recruiter's obligations to the client and whether the recruiter may recruit the client's employees for other positions. See Forum Personnel Inc., 2002 WL 424344, at 1 (recruiter did not violate any obligation to client by placing client's own personnel manager with another company when the parties' contract did not prohibit this activity); see, e.g., Northeast Gen. Corp., 624 N.E.2d at 131 (courts should look to contract in determining scope of obligation of an entity retained to find suitable candidates for acquisition).

From the perspective of a hiring company, a contract with a recruiter ideally will include a provision that, during the term of the engagement and for a defined reasonable time after the engagement, the recruiter will not solicit the company's employees for positions with other employers. What constitutes a reasonable amount of time for the prohibition to remain in place after the conclusion of the recruiter's assignment for the client will depend on the nature and length of that assignment, the size and location of the client, and the industry involved. As mentioned, the National Association of Personnel Services guidelines suggest a prohibition lasting one year from the recruiter's last placement with the client while The National Association of Legal Search Consultants' Code of Ethics includes a six-month prohibition.

For companies with multiple offices or divisions, the contract also should specify whether the prohibition applies to all offices or divisions, and, if not, from which offices or divisions the recruiter is prohibited from recruiting. Other variables include whether the prohibition on recruiting applies to all employees or only employees above a certain level of responsibility or within a certain practice area.

While uncertainties abound in this area, there appears to be one constant truth: An employer should be proactive in protecting the company from the very real risk of losing its own employees to the very recruiter hired to add to the work force.
 


Jeffrey S. Boxer is a partner in the litigation department of New York-based Carter Ledyard & Milburn LLP, where he focuses on commercial employment torts, protection of trade secrets and enforcement of restrictive covenants. Michele Abraham, an associate at the firm, and Erik Gaines, a former summer associate currently a student at St. John's University School of Law, assisted in preparing this article.

Reprinted with permission from the October 2nd, 2006 edition of The National Law Journal © 2006 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.


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