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25 Ways That “No-recruit” Secret Agreements Can Damage Your Firm

by Feb 6, 2012, 5:36 am ET

This “think piece” is part of a series of articles I wrote to expand your thinking about strategic HR.

If you haven’t seen it in the news lately, there has been an uproar over the practice of secret “no-recruit” agreements between major corporations. A significant number of notable firms including Google, Apple, Intel, and Pixar have been accused of restraining the movement of employees between firms. But don’t be misdirected by all of the legal issues.

The real damage that these agreements can have is on your firm’s business results, and at a large firm, these damages could reach hundreds of millions of dollars. If you work in HR or recruiting, you need to be able to advise senior managers of the unintended consequences related to these agreements. If you currently use no-recruit agreements or you are considering one, this article covers the numerous potential business problems and impacts associated with them.

Potential Problems and Issues Related to Using “No-recruit” Agreements

The 25 problems are broken into two categories, 1) ways that these agreements can hurt your firm and 2) reasons why the agreement may not even work.

Note: I frequently call these agreements “secret” because that is a goal. But with the growth of social media, they are becoming a poorly kept secret.

Ways That These Agreements Can Hurt Your Firm

  • A loss of trust among employees — because of the potential legal issues, almost every firm keeps these agreements secret. However, if your firm has corporate values that include honesty and transparency, when the fact that the company is keeping secrets from employees gets out, any built-up trust will be damaged or lost. Restricting an employee’s freedom without telling them can have many ugly repercussions.
  • Poorer treatment of employees may lead to productivity/recruiting problems — if the goal of the pact is reached (dramatically reducing turnover), managers and HR professionals will not have to work as hard to keep the best. This may lead to degradation in the treatment of employees and the benefits offered to them. An unintended consequence of this poorer treatment may be a measurable decrease in employee productivity, engagement, and innovation. The resulting weakened and slower improving HR practices and benefits may also harm your employer brand image and whatever recruiting you do outside of the agreement.
  • Limiting new ideas and best practices — “no-recruit” pacts restrict or prevent the hiring of new employees directly from your competitors. This can severely limit the infusion of new ideas and the best practices from your competitor’s employees. And if your firm is not  No. 1 in your industry, your chances of moving up may also be restricted.
  • It may restrict rapid company growth — in order for a firm to grow rapidly, it may rapidly need a large amount of already trained talent to support new products or initiatives. Unfortunately, no-recruit agreements make it almost impossible to rapidly get large amounts of ready-to-go talent from the most logical sources: your competitors.
  • You are forced to hire those who are less prepared — because most of the well-trained and experienced talent will be at large firms in your industry, the agreement may force your firm to hire employees from smaller firms, where the employees are likely to be less trained and prepared. Many firms are then forced to increase their percentage of college hires because most experienced talent is restricted.
  • Fewer promotional opportunities may restrict leader development – if the goal of reduced turnover is reached, there will be fewer openings for your best employees to get promoted into. This stagnation will frustrate your best and brightest, and more importantly, it will slow their development. And because you can’t recruit fully developed leaders from your competitors, you may eventually face a leadership shortage. If you want to maintain an effective rate of employee and leadership development, you will have to devote extra resources to develop a powerful development function.
  • Your bad employees will stay much longer — the agreement is designed to prevent the loss of your best employees but it will restrict your weak employees from leaving also. Instead of leaving, your weak employees will continue to generate lower productivity and frustrate your top performers. Unless you develop a “no-recruit-except-weak-performers” agreement, you may have inadvertently damaged your firm for years.
  • Knowledge of your customers may also be reduced — one variation of these agreements narrows the recruiting restriction to a firm’s major industrial customers. Obviously regularly recruiting away a customer’s top employees won’t win you a popularity contest. Occasionally hiring a customer’s employees may strengthen bonds, communications, and it may help you better understand the customer’s needs.
  • The realization among employees that they don’t come first — once the word gets out, employees will instantly realize that all the speeches about providing employees with freedom get neutralized, because in this case, clearly the company is consciously putting itself ahead of the needs of its employees.
  • Employees feeling owned — preventing other firms from poaching “its” employees sends a clear message that the company feels that it “owns” its employees. No one likes feeling “owned” and diverse employees may have an even greater negative reaction.
  • Damage to your external employer brand damage – once the word gets out to potential applicants and the public, the firm’s external brand image will tank. You may also permanently anger top applicants from restricted firms when they are rejected outright for no logical reason.
  • Internal employer brand damage – once the word gets out among your own employees about this repugnant practice, your internal brand will be damaged, and that may negatively affect the way that your employees respond to your customers.
  • Damage to employee referral programs — if you succeed in keeping the agreement secret, your employees will not know that they shouldn’t make referrals from competitor firms. Once high-quality employee referrals go nowhere, without explanation, employees will naturally slow down their referrals from all sources.
  • The best recruiters won’t want to work for you – the very best recruiters know about these agreements and most of the best dislike the thought of recruiting with their “hands tied.” And with fewer top firms to target, you will likely need superior recruiters in order to bring in the best.
  • Not being able to poach locally may increase relocation costs – another variation of these agreements restricts recruiting from major firms in the same community, even if they are in different industries. Obviously when “local poaching” is restricted, more often than not you will need to hire from outside the area. Requiring more candidates to relocate will make recruiting much more difficult and costly.
  • Small firms may become more competitive in recruiting — employees may become frustrated when they find that they “can’t leave.” As result, they may jump at the first chance and go to a small or less desirable firm (that is not covered by an agreement). A firm that they normally would not have considered. And if they choose, they can later move directly to a formally restricted competitor of their former firm.
  • It may negatively impact government contracts – should you be found to be breaking the law, it may impact your ability to get future government contracts.
  • Enforcement can be time-consuming and expensive — some of the recruiters under the agreement may not “get the message” (which occurred in the Google-recruiting-from-Apple case). As a result, executives will be forced to spend the time and the expense of “lawyer letters” to fix the mistakes. And because the agreement itself is probably illegal, you likely can’t go to court to enforce it.
  • It’s a contradiction — and finally, if you happen to be an advocate of free trade and open market capitalism, you will likely have difficulty explaining to your Republican friends the hypocrisy of your actions.

Reasons Why the Agreement May Not Even Work

  • A cold-calling ban may be insufficient — some of the agreements only restrict “cold calling” or making the first contact (as opposed to an absolute no-hiring ban). And as a result, smart recruiters often find a way to ruse or convince employees at the target firm to make the first contact.
  • Third-party recruiters can be used to go around it — most external third-party recruiters are not included in these corporate agreements, so competitors can still hire your employees; they just have to do it indirectly through a third-party. Some executive search firms have don’t-recruit agreements with customers, so finding a top firm to manage your go-around can be problematic.
  • Employees will still find a way to work for your competitors, indirectly — rather than going directly to a competitor, your clever employees will find a way to get there indirectly. All they have to do is to make a short stop working at a consulting firm or they can simply take a long break and apply. Ex-employees are not normally covered by these agreements.
  • Limited poaching will occur anyway — even though the agreement says no recruiting, in practice you can get away with hiring one to three people a year from a firm without getting a stop call or a “lawyer letter.” Recruiters love to stretch limits, and many managers will go along up until the point where someone complains.
  • Even keeping the agreement secret is difficult – with the growth of social media, you can almost guarantee that your recruiters (especially contract recruiters) will informally spread the word about the restriction.
  • Some competitor firms simply won’t go along – these agreements can only have their maximum impact if all of the major players in an industry or geographic region participate. With the recent U.S. Department of Justice and civil lawsuits and the publicity that surrounds them, fewer executives will even be willing to discuss these agreements. Already, most global firms simply refuse to participate.

Final Thoughts

I have written about this questionable practice on numerous occasions including my recent article called Recruiting’s Dirty Little Secrets. Although secret, this practice is quite common not just in high-tech but it is also not hard to find in healthcare, major accounting firms, and among consulting firms. There are arguably some potential benefits related to this practice. They include: it pleases your major customers; it may reduce salaries by restricting bidding on candidates; and you may have less turnover because fewer recruiters are targeting your very best. However, after extensive research on the potential problems, I have concluded that the ROI of these agreements is weak and it is getting lower by the day.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  • Bill Gallop

    This is standard practice in the world of Government Contracting. No news here… and no changes expected.

    I support 6 different programs in the DoD/Intelligence community. Every program has a team of 5-30 companies on the program. We are expected to know every company (team member) and honor the No Recruit clause on that program.

    As the government shrinks and budgets get cut this will only get worse. I hate to say this… but I see no end in sight here.

  • Pingback: No-Recruit Agreements are Just Nonsensical: 25 Ways That “No-recruit” Secret Agreements Can Damage Your Firm « abrownhrpro

  • http://www.techtrak.com Maureen Sharib

    Isn’t that interesting that some of the standard offenders are government contractors?

  • Bill Gallop

    Maureen… this is not against the law (at least not in Virginia or Maryland). It just makes recruiting more “Interesting”.

  • Keith Halperin

    @ Maureen, Bill:
    Remember the Golden Rule:
    “Them what has the gold, makes the rules.”

    http://www.vanityfair.com/politics/2012/01/Todd-Purdum-on-National-Security

    January 2012
    One Nation, Under Arms

    The private papers of the late George F. Kennan, Cold War architect and diplomat extraordinaire, reveal his anguish over the way his famous 1947 warning about Soviet expansionism helped transform the America he loved into one he no longer recognized: a national-security state. A half-century after a similarly historic warning—President Dwight D. Eisenhower’s speech about the dangers of a powerful “military-industrial complex”—Todd S. Purdum shows how completely Kennan’s and Eisenhower’s worst fears have been realized, warping almost every aspect of society, deflecting attention from urgent problems, and splitting the country into two classes.

    …………………….

    Cheers,

    Keith

  • http://www.techtrak.com Maureen Sharib

    I would be remiss not to offer this:
    Phone Sourcing and Free Enterprise tinyurl.com/7z9j8of

  • http://www.techtrak.com Maureen Sharib

    Bill, are you saying no-poach agreements are not against the law?

  • Bill Gallop

    Maureen,

    That is exactly what I am saying. They may be replusive and limiting in practice but there is no State (MD/DC/VA) or Federal law against this.

    I hate it… but if you want to play in the Federal Contracting world you probably have to follow this practice.

  • Keith Halperin

    It’s “Free Enterprise” until you win, then it’s “Crony Capitalism” to make sure you don’t lose….That’s the American Way of Business.

    Cheers,
    Keith

  • http://www.pjmconsulting.com.au Peter Macdonald

    Not sure about the USA but in OZ I believe that rejected candidates who find out why they were rejected ie: “no-recruit” policy have a justifiable claim in the courts for a discrimination case. Effectively the existing employer of the employee is claiming “ownership” of the employee without compensating them for the handcuffs and restricting the employees ability/right to work. This would be particularly so in the case of a small specialised industry with only a few employers.

  • Bill Gallop

    Peter,
    Its not the case here in the states. In fact no reason needs to be given directly to the candidate at all (for commercial businesses). Common practice is a simple letter or card stating “you were not selected”.

    In the US, Federal Government contracts we have a law called OFCCP. This dictates how candidates must be accounted for when being considered for a position. This law does not require a reason be sent to a candidate but does require documentation internally as to why someone was not chosen.

    Its not a good practice… Its not a wise practice… It is done on every program I have worked for the last 7 years.

    Bill Gallop

  • http://www.techtrak.com Maureen Sharib

    Bill, so why did the Justice Dept involve themselves in this matter?

  • Bill Gallop

    Maureen,

    It is common practice for the Justice Department to “Look Into” something if asked by a Congressman/Senator or other parties who feel this might be illegal.

    I have worked on Department of Justice programs too and they request the same consideration on their programs.

    BILL

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