Pitfalls When Hiring Laterals
How CPA firms can avoid staffing litigation.
September 14, 2009
Many CPA and other professional service firms grow their business through hiring lateral partners. Lateral hires are those professionals who have several years of experience and are brought on to supplement a workforce hired directly from school or at entry-level positions. These professionals are typically hired for their experience and to strengthen specific practice areas. While the current economy in particular presents significant opportunities for hiring laterals, there are certain steps every firm should take when doing so that will also minimize their risk. This includes considering potential conflicts of interest, considering restrictive covenants, checking references and licenses and some other basic due diligence.
Check for Conflicts of Interest
Just as CPA firms need to be aware of potential and actual conflicts when taking on new clients, the same holds true of new hires. For example, did a CPA you are hiring previously counsel a business with which your existing client is negotiating? Did they provide tax advice for a transaction in which one of your firm’s clients was also involved? Or maybe the CPA testified as an expert witness against one of the firm’s clients in a lawsuit. These and myriad other situations can present conflicts that the hiring firm should be aware of before making the hiring decision.
Consider not only existing conflicts, but also the lateral’s prior engagements or relationships that might present future conflicts. Also consider any outside activities in which laterals may be involved. For example, do they sit on the board of a client the firm is auditing? Or do they own shares in a company for which the firm is providing attest services? Ferreting out these issues before hiring will avoid problems down the road. And while this information should typically be obtained prior to extending an employment offer, if that is not possible, consider making any offer contingent on the absence of any conflicts.
Is the Lateral Bound by Any Restrictive Covenants?
Find out whether laterals signed non-compete or non-solicitation agreements with their prior employers. While the hiring firm may not be a party to those agreements, if they hire a lateral, who then violates a non-compete agreement, the firm may be accused of tortuously interfering with a business relationship, contract right or prospective economic interest. There may be other instances in which restrictive covenants will similarly impact your firm’s ability to do work for certain clients. This is particularly important where one of the motivating factors in hiring laterals is the client base that they expect to follow with them to the new firm. These potential new clients should of course be included as part of the conflict check mentioned above.
Similarly, find out whether a lateral hire gained access to any trade secrets that they might be using at your firm. This could include a confidential pricing model to which a CFO was exposed, or in some instances highly developed client lists. This may impact whether any restrictive covenants are legally enforceable and whether your firm may have exposure if the lateral uses the information in their new position.
On a related note, if the lateral intends to bring other colleagues along to your firm, either at the same time or a later date, make sure they are not violating any agreements with the former employer that prohibit them from doing so.
Checking References and Licenses
When checking references from the lateral’s existing employer, it is good practice to first get the lateral’s permission. Stories abound where firms contacted a lateral’s current employer and inadvertently informed them that the lateral was considering leaving, before the lateral gave the prior firm notice of the departure. Particularly if the lateral is not hired, they may then complain that the inquiry jeopardized their employment relationship.
It is also a good practice to determine whether the lateral has been involved in any legal proceedings, particularly for malpractice or workplace misconduct. On a related note, consider whether and how the hire may impact the firm’s professional liability insurance coverage and find out if the lateral is aware of any existing or potential claims. Also consider what steps, if any, need to be taken to ensure that the new hire is included within any insurance coverage.
Similarly, it may sound like a given, but if the lateral is a CPA or has other licensing credentials, make sure their licenses are active and check on any prior disciplinary action (it is surprising how often these issues arise where professional licenses are involved). Other credentials should also be verified.
Consider appropriate background checks on laterals, consistent with what is permitted by state and federal law. This might include both a criminal background check and financial background check. Also be cautious about making statements regarding the lateral’s prior employer, so as to not unnecessarily subject your firm to a disparagement or defamation lawsuit.
Finally, if the lateral will be hired as a partner, make sure the partnership agreement is appropriately modified where necessary, or that other required documentation is completed. If there is a grace or probationary period, make this clear to the candidate at the outset.
There is always some uncertainty with new hires. This is particularly true at the partner level, where mistakes may take on greater significance. And there is substantial work to be done when integrating a lateral partner into any practice or organization. But taking these basic precautions during the hiring process will help minimize the potential pitfalls that can arise both during that process and beyond.