Monday, December 26, 2016

Employee Poaching Vs Employee Referral and ethical dilemma

What is poaching, types and sector case studies and ethical point of view

Introduction:
The word poaching before entering into the corporate domain had  illegal capturing of wild animals, usually associated with land use rights. With the change in the business environment, the term has been used in the business also and many organization has realized its importance. From animal, it moved any organisation’s most valuable assets- human resource. Animals were valuable when it was agrarian society, human resource is valuable in today’s industrial society. Started with Silicon Valley, the no poach agreement has spread across the world. Many prominent companies have implemented this on their appointment letter, getting it signed with from its employees, from the vendors with whom they are working, competitors and a third party where they are sharing their data. It has given rise to several question such as whether this is a capitalist economy or open economy? If it is an open economy, then why it is restricting people’s mobility? (@. (n.d.). Silicon Valley's No-poaching Case) .
This paper examines various aspect of poaching, no poach agreement, its effectiveness and most importantly, the ethical issues involved in such policy, its implication and a conclusion drawn from the study carried out. The study is based on primary data drawn from discussion with various HR leaders and decision makers and also based on various secondary data and references. This paper also examines referrals. Referrals is a sourcing tools used by various organization to hire manpower need, its best practices and industry study. Referrals and no poach agreements are completely opposite to each others. The no poach agreement is  relationship and conflict between no poach agreement and referral , ethical issues involved in the conflict and conclusion.
What is no poach agreement?
It is an agreement by two unrelated companies to not poach each other's employees. While this can be viewed as a bit of an end run around non-compete agreements, the impact of a no-poach agreement is far less detrimental to the employee. (Beck, 2009). The whole idea behind no poach agreement is when an employee leave the organization, he takes lot of data about employees, intellectually property of the company, technical knowledge and these are the essential things for a 21st century organization specially knowledge based organization. No poach agreements are such type of restriction by which an organization want to restrict an employee from creating competition for its organization. (Beck, 2009). The no poach agreement is a kind of risk mitigating tools adopted by various organization.

Who signs a no poach agreement?
A no poach agreement exist between:
A.    A employer and an employee: In such type of no poach agreement, a clause in mentioned in the appointment letter as well as in the code of conduct, standing orders and employee handbook of the organization which falls under the purview of The Contract Act 1872, The Standing Orders Act and sometime also part of The Industrial Dispute Act.
A non-compete clause is well known under the Contractual Laws as the clause being made out into any agreement between two parties where one party is the employer and the other party is the employee. By virtue of this non compete clause, the employee undertakes and gives his acceptance to the condition of the employer that during the course of the employment or even after the employee leaves the services/job of the employer, he will not be the competitor of the employer in the form and nature of the employment of the employer. The Non-compete clause finds place under the agreements and contracts throughout the globe. When we see the Indian legal scenario about the non compete clause, it is prohibited under the Law of Contracts.
Section 27 of the Indian Contract Act-1872 provides that ”Every agreement by which anyone is restrainedfrom exercising a lawful profession or trade or business of any kind, is to that extent void”.
Exception : One who sells goodwill of a business with a buyer to refrain from carrying on a similar business within specified local limits so long as the buyer, or any person derivingtitle to the goodwill from him, carries on a like business therein provided that such limits appear to the court reasonable, regard being had to the nature of business. ((Singh, 2006)
We will examine a detailed legality of this in later in this paper presentation.
Example of no poach agreement between an employer and employee: ICICI Bank, ICICI foundation, Sony Music Entertainment, Sony Corporation of USA, Sony Japan etc. have a no poach agreement with its employee while taking employment even within a group company.
B.     Between two different organization involve in similar kind of business activities:
A major threat to human resource is from similar industry. A similar industry gets lot of human resource trained in the specific know how and technical training from other organization. An organization spends lot of time and money on training a raw candidate, making technically and functionally fit for the role. When a senior and top manager leave the organization, often he/she takes most of his/her team also which result into huge productivity and quality loss of the oganisation. The recent example is Ramakrishna Ramamurthi. He was executive director with A leading organisation Electrical. When he moved as a Deputy Chairman and CEO to Competitor organisation, he took most of the senior management and sales team alongwith him. This wiped out A leading organisation Electricals major market share and company faced a huge setback (linkedin.com). Several such example exist in global organization. As a fair trade practice and consensus, many organizations have entered into no poach agreement. In India, the example is Aditya Birla Group- agreement between Grasim Readymix Cement and Ambuja Cement, Idea Cellular network with Airtel and Vodafone. In Global scenario such Apple and Google (both are organization involved in lot of research and development and have huge cost on people investment), Intel and Adobe System. Such type of agreement exist in major knowledge based organization. Indian IT industry spends almost Rs. 3000 crore in hiring fresh engineering graduate, developing, nurturing and making them employable. (manupatra/ Gupta, 2016) Once trained, there is  huge chances them being poached. In such scenario, it is inevitable for an organization to protect its interest.
C.    An organization and its vendors/ suppliers: A no poaching agreement also exist between an organization and its suppliers. The supplier may include raw material suppliers, manufacturers, a recruitment or other service provider. When a company signs a service agreement with its service providers, it protects rights by restricting its vendor partner poaching its employees. Such example exist between Pepsi Foods Ltd. And others Vs Bharat Coca Cola Holdings Pvt. Ltd. And others. (Manupatra/ Gupta, 2016). The provisions of these no compete agreement is so strict that once a Pepsi Employee is always a Pepsi employee. More powerful an organization, more powerful it was in enforcing the non compete agreement.

Legality of Non compete agreement in India: The Non Compete Agreement is part of restrictive covenants.
An agreement in restraint of trade has been defined as “one in which a party agrees with any other party to restrict his liberty in the future to carry on trade with other persons who are not parties to the contract in such a manner as he chooses”. As an exception to this general rule, agreements under which one party sells his goodwill to another, while agreeing not to carry on a similar business within specified local limits, are valid, provided such agreements appear to the court to be reasonable. Article 19 (g) of the Constitution of India clearly provides every citizen the right to practice any profession, trade or business. This is not an absolute right and reasonable restrictions can be placed on this right in the interest of the public, the courts have always been weary of upholding such restrictions and have kept the interpretation of this provision flexible so as to ensure that principles of justice, morality and fairness are aptly applied, depending upon the facts and circumstances of each case. Employers often tend to incorporate restrictive covenants in the agreement to protect their confidential information and trade secrets as well as their growing business. For any restrictive covenant to fall within the ambit of Section 27 of the Contract Act, the agreement has to be in restraint of trade. Unlike the law in the United Kingdom, the Contract Act does not distinguish between partial and total restraint of trade, if the clause amounts to restraint post termination of the agreement, then the same is void. Section 27 itself is succinct and doesn’t offer insight as to what kinds of restraints are valid; the qualification of ‘reasonable’ restraints being valid and enforceable has been read into Section 27 by the courts.5 To determine whether a restrictive covenant in employment contract would be reasonable and valid or not, the courts have paid due regard to bargaining power of each party, reasonableness of restrictions set out in the covenant, time, place and manner of restriction etc. In India, due to the heavy bargaining power of the employers, the trend is for the courts to protect the rights of the employee and adopt an interpretation favourable to the employee. Section 27 of the Contract Act has been applied in the context of (1) employer - employee contracts, (2) contracts with partners, (3) dealer contracts and (4) miscellaneous cases. While it is a settled position of law that restrictive agreements bind current employees in lawful employment of the employer throughout the duration of the contract6 , the position of law regarding validity of such restraints on employees after termination of contract is more contentious and adjudicated before courts. The Supreme Court of India (“Supreme Court”) in Niranjan Shankar Golikari v. Century Spg & Mfg Co. Ltd7 enumerated the tests to determine the validity of ‘restrictive’ agreements in terms of Section 27 of the Contract Act. In this case, a foreign producer collaborated with a company manufacturing tyre cord yarn by an agreement which stated that the company would maintain secrecy of all technical information. In pursuance of the agreement, the company signed a non-disclosure agreement with the appellant, at the time of his employment.
Thus, if we examine there is always conflict between a fundamental rights (as Individual’s right under constitution of India Vs Contract Act).

Ethical issue involve: Ethics is what you follow beyond the law. You do it in fairness even when law does not ask you to do it.  This is an ethical dilemma companies are in when filling niche positions. It was towards the nineteenth century that the employer-employee relationship shifted to a voluntary relation, where the power is distributed.
Poaching should be accepted, and even encouraged, to make companies more competitive. Moreover, any sort of Non-Solicitation agreement between organisations is unjustifiable under the current socio-economic conditions. The Non-Compete agreement between the employer and the employee is not legally enforceable. Organisations can’t bar an employee from venturing out of the organisation. Employees are to be treated as free people and not as subjects or assets that a company owns. There is no ethical issue involved with poaching; the final employee always has the discretion to reject the offer. Poaching can, in a free market, help organisations to put their assets to the best use.
As offshore outsourcing goes mainstream in India, multinationals are hiring Indians to head their teams in foreign markets. Notably, Accenture and Capgemini are increasing poaching employees from their Indian rivals, like TCS, Wipro, and Infosys, to compete more effectively against these companies.
When Jet airways restrained its pilots from joining Sahara, on the grounds that it had made considerable investments in training them, the court ruled in favour of the pilots stating that the skills and the knowledge acquired are a property of the pilots and they were free to take up employment with Sahara.
Poaching becomes unethical or illegal when the candidate, for a job, is misled by a company about the job being offer. Some practices associated with poaching cross the line when the employee is hired to steal information or clients related to the employer. Anti-poaching agreements are relevant when two organisations are engaged in joint-venture.
Employees are poached from ‘vulnerable’ companies. The real issue lies in the employer-employee relationship; it is a failure of the company to retain its employees. The reasons could vary from the pay and benefits to the whole employee proposition or because of their bosses.
The HRs should pick up signs displayed by employees at work. The most frequent sign is change in habits related to work, i.e., there is lack of engagement with projects or colleagues, large number of absences, getting up-to-date information on expense accounts.
Companies have been taking several measures to retain and attract employees by benchmarking on their employment brand against the competitors. Being competitive in pay and benefits and in the whole employment proposition could be the key. Long term incentive plans tied to the success of the business as a whole and succession planning could send a message to the employees that they are significant role and are valuable to the success of the business. Employees also leave because of their bosses, to retain employees, the managers should be effective. Knowledge sharing and trainings such as, Supervisory training, Leadership training could instill useful management skills.
Sectoral Case study: There is very few cases available related to no poach agreement in social sector. Except ICICI foundation, we could not find any organization implementing or enforcing any from the 3 cases mentioned above. We have given numerous example of such cases, policies in this paper. Here is the details about ICICI foundation’s no poach agreement.
ICICI Bank is India's largest private sector bank with total assets of Rs. 7,206.95 billion (US$ 109 billion) at March 31, 2016 and profit after tax Rs. 97.26 billion (US$ 1,468 million) for the year ended March 31, 2016. ICICI Bank currently has a network of 4,450 Branches and 14,393 ATM's across India.
In 1955 ICICI was formed as an initiative of the World Bank. In the 1990s, ICICI trans-formed its business from a financial institution limited to development projects to a diversified financial services group. Ever progressing with the times.
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary.

ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its group companies.
ICICI Bank has pioneered many technological innovations in the industry - Internet Banking, Mobile Banking, Tab Banking and Fully Automated Touch Banking. Carrying forward the aim to deliver an exceptional banking experience to its customers
Thus ICICI Bank offers wide range of products, promotes innovation, thereby provides good career opportunities to new recruits.
However while signing any new contract ICICI Bank has included terms and conditions of no poaching in contract i.e. employee cannot join its competitors post leaving the job for a period of minimum six months. The employee has to sign no poaching agreement while signing this contract. This is applicable for employees at all levels.
Reasons for inclusion of no poaching contract for ICICI Bank:
1.      No poaching clause protects employees from poaching- ICICI Bank hires talented people. The no poaching clause protects the new skilled, talented people being poached by their competitors.
2.      ICICI Bank is financial institution and it is one of the best brand in India. Competitors can keep an eye on knowing the secret strategies, innovative plans. Competitors can provide attractive offers to employees to join their organization as it will help them learn about the secret, innovative strategies of ICICI Bank. No poaching agreement provides security from information leakage by employee to competitors.

Reason of employees signing the contract:
1.      Employees sign this no poaching agreement as they get attracted to ICICI Bank brand, good salary packages and career growth opportunities.

2.      However  these employees never follow the no poaching clause. As discussed with ICICI Bank employee, most of the employees join competitors job immediately post resignation.
Reason for employees not following the no poaching clause signed in agreement:
1.      Employees get attracted towards the job offersand good career opportunities offered by other firms.
2.      Following no poaching agreement can deprive the employees of good career opportunities and their personal growth. So employees take a risk of opposing the no poaching clause.

3.      Also most of the employees get to  know from peers that ICICI Bank doesn’t take any legal action even if they don’t follow the clause of no poaching agreement.
Reason of why ICICI Bank doesn’t take the any action even when employees don’t follow the no poaching agreement:
1.      No poaching agreement is unethical as it contradicts the constitutional rights of equal opportunity for one’s self growth. No poaching deprives the employees from availing of good career opportunities. The skills and abilities are personal assets owned by employees, so they should get the freedom to utilize these assets for their personal career growth. ICICI Bank has built up good brand image and so it doesn’t act on this issue as it’s highly debatable.

2.      Employees leaving jobs and joining the other competitors reflects failure of organization to retain its employees. ICICI Bank doesn’t want to showcase this failure.

3.      If ICICI Bank takes legal action against the employees who don’t follow no poaching agreement, the stakeholders like media, customers, employees, can raise a voice against this clause. This can damage the brand image of ICICI Bank, further causing decline in sales volume and revenues.

What an organization should do then?
1.      In their internal policy, they should also make sure that in referral, an employee does not breach clause of his/ her previous organisation’s no poach agreement and by doing so, they can remain ethical.
2.      An organization should not restrict its own employee as well as vendor/ supplier from healthy competition and should not restrict them under pretext of signing no poach agreement.
3.      It is possible to remain ethical while practicing no poach agreement and employee referral programme.
4.      Thus the case study reveals that no poaching is unethical so the ICICI Bank also fears to take action against the employees who don’t follow no poaching agreement even if this clause is designed by the company itself.

Further reading and source:
@. (n.d.). Silicon Valley's No-poaching Case: The Growing Debate over Employee Mobility - Knowledge@Wharton. Retrieved November 28, 2016, from http://knowledge.wharton.upenn.edu/article/silicon-valleys-poaching-case-growing-debate-employee-mobility/
@. (n.d.). Silicon Valley's No-poaching Case: The Growing Debate over Employee Mobility - Knowledge@Wharton. Retrieved November 28, 2016, from http://knowledge.wharton.upenn.edu/article/silicon-valleys-poaching-case-growing-debate-employee-mobility/
Beck, R. (2009, October 30). Opinion: No-poach agreements: A new generation of restrictions. Retrieved November 29, 2016, from http://www.computerworld.com/article/2528792/it-management/opinion--no-poach-agreements--a-new-generation-of-restrictions.html
Singh, A. S. -. (2006). Non-compete clause in the Indian law of contracts - an insight. Retrieved November 29, 2016, from http://www.lexology.com/library/detail.aspx?g=31ca32d5-6c37-4f0e-a647-869666352b17
Profile of Rmaakrishna Ramamurti accessed from his official Linkedin profile Retrieved November 29, 2016, from https://www.linkedin.com/in/ramakrishnan-ramamurthi-33a3145
Gupta, P. (2016, May 05). Anti Poaching Agreements. Retrieved November 29, 2016, from manupatra.co.in, http://www.manupatra.co.in/newsline/articles/Upload/091CA8F9-A438-4323-9170-7BC5182387F5.pdf



p.s. in the next 2 consecutive article, I will write a standard no poach agreement and no poach policy

Govind
Mumbai
Nov 30, 2016

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