When contractors jump ship
Are restrictive clauses ethically binding?
It never fails. Just as soon as I say that I don’t like making comments about specific situations (see “Is this unethical? What should I do?” at , someone comes along and presents me with a case that’s too intriguing to pass up. I find it interesting because there are good arguments on all sides and I think it might be something that comes up quite a bit.
A reader sent me the following account:
“We are a consulting firm and provide software development services to our clients. Due to the peaks and troughs nature of our business, we frequently hire subcontractors to add to our team when we need more people.
“One of our clients recently started the second phase of a large project. They hired a cheaper (i.e. off-shore) firm to do the majority of the work on this new project and they told us they did not need any of our development team to aid in this new project. They then contacted our subcontractors directly and hired them to aid on the project.
“In our agreement with the client we have a clause that requires the company to pay us some amount if they should do this. However, we have been told that this clause would probably not hold up in court (especially not here in California) and our client has way more lawyers and money than we do to attempt to even bring it to court.
“We also have in our agreement with our subcontractors that they won’t solicit business from our clients within six months of leaving us without paying us a percentage. We have been told that this would probably not hold up in court either. (Though one of these subcontractors has offered to pay us a minimal fee.)
“Do you think this was ethically inappropriate either on the part of the client corporation or the subcontractors? Do you think it unethical of us to be including these types of clauses in our contract?”
The first argument that comes to mind is that all parties signed an agreement to certain conditions and that they would be ethically required to abide by those conditions, unless they negotiated a different arrangement. I think that would find a lot of support, and it seems to have a lot of weight. We generally hold people to their agreements that are freely entered into.
However, given that so many of us are presented daily with small-print conditions that we can only consider on a “take-it-or-leave-it” basis, which someone could argue impinges on their ethical force, I think it’s worth pursuing this a little further.
The writer doesn’t say why the courts wouldn’t enforce it, but if that’s true, then it’s an indication that the courts feel the condition may not be a truly negotiated condition of the contract and merely some sort of boilerplate — like the statement on the back of your parking lot stub that says the operators aren’t liable for damage to your car, when clearly they are if it occurs through their fault or their negligence.
The subcontractors could argue — and probably would — that signing up to work a contract position is not indentured servitude. (The writer didn’t say whether the “subcontractors” were companies or persons, but I’ll assume they are individuals.) As contractors, they are free to offer their services to anyone willing to pay, and they should not be restricted by someone just because they once worked for them.
They would probably point out that agreeing to the clause wasn’t a matter of totally free choice because there were no reasonable alternatives open to them. Most people hiring contractors put in clauses like this, so it’s not as if the contractor could shop around to find someone who didn’t — and who at the time needed the particular skills in question.
The other company — call it Company X — could also argue that it is free to hire whomever it wants from the open market. In fact, it could probably even recruit people from within the consulting firm’s own ranks without having to pay any sort of a penalty to the consulting firm. After all, this isn’t major league baseball, in which players have to reach free-agent status before they’re able to sell their services to the highest bidder.
Company X could also argue that it had completed its original agreement with the consulting firm. The consulting firm had done its work, and Company X, they would say, had paid it the agreed-upon amount. At that point, the relationship between them was finished. Any subsequent hiring decisions started all over again at Square One.
The consulting firm, of course, would see things completely differently. “This is exactly like major league baseball,” it might argue. “We invested time and energy in this person and we consider him/her an asset to our company. We do have a reasonable expectation of regaining that investment in some way — either by hiring out the services or receiving a payment if someone else with whom we have a relationship, hires him away from us.”
The arguments would most likely be that it had recruited and found this person with these specific talents. The firm had checked his or her background and had taken a risk that the contractor would work out. It would also argue that it was the one who introduced the contractor to Company X and that, in doing so, had added value to the relationship for both parties, a value that wasn’t completely satisfied by the payment of the original contract.
When a consulting firm invests the time and energy in developing relationships with both subcontractors and clients, it relies on the possibility of using those relationships over time. If it has to find, qualify, and take on new contractors for every job, it might restructure its fees to account for the added expenses.
It seems to me that the consulting firm’s argument is the strongest. It has provided a service to both the subcontractor and Company X that exceeds the benefit either received in the initial relationship. The contractor was paid for his/her services, but got the job because of the work the consulting firm had done in securing the position.
Company X received the services, but benefited because the consulting firm had recruited, qualified, and taken responsibility for the subcontractor. After all, if the contractor had left in the middle of the project, the consulting firm would have had to get a comparable person to fill the slot. The consulting firm was taking all the risk and Company X was taking very little.
So, I think it’s not unreasonable to see some sort of an ethical obligation to live up to the agreement in the contract. Obviously, this shouldn’t be a life-long restriction, but such a clause for a limited period seems to protect the interests of the consulting firm for the work it did and the risks it took. Of course, I could be wrong. And if I am, I’m sure you’ll let me know.
Drop Carlton Vogt a note at [email protected]. To discuss any of these issues, you can go to the Ethics Matters forum at .
