What are the Cases Where Employee Poaching Becomes Illegal?

Employee Poaching refers to the act of encouraging employees from other companies to change jobs by offering better conditions than their current compensation and treatment, and it is a legitimate business activity.

An employee’s decision to change jobs of their own accord falls under the ‘freedom of choice of occupation’ guaranteed by Article 22 of the Japanese Constitution, and is not a problem.

However, depending on the method and process of ‘employee poaching’, it may lead to claims for damages.

While the subject of damage claims is often the individual who actually carried out the poaching, there are cases where the company can be claimed for damages.

In fields such as IT, there are many cases of engineers being poached by competing companies. Can a company that has had a valuable employee poached claim damages against the other company on the grounds that the poaching is illegal?

In this article, we will explain in detail about the patterns of ‘employee poaching’ that may be illegal.

The Three Major Patterns of “Employee Poaching”

There are three major patterns to this employee poaching behavior.

1. Current directors or employees enticing other employees to the company they plan to transfer to
2. Transferred directors or employee poaching their own company’s employees
3. Other companies poaching your company’s employees

In these, for [1.], as it is employee poaching by “individuals” such as directors or employees, the company they plan to transfer to will be held responsible only if they conspired with the transferring directors or employees to carry out the employee poaching.

For [2.] and [3.], they are the same in the sense that they are employee poaching by “other companies”, but in the case of [2.], the point is what kind of contract the transferred directors or employees had with the company, in addition to the method of employee poaching.

Furthermore, if the person being employee poached is satisfied with the result of the negotiations, it will be considered a success. The accepting company can acquire excellent, ready-to-go talent, and the individual will be able to work at a company with better conditions.

What is Illegal Employee Poaching?

Illegality of Employee Poaching and Liability for Damages

The possibility of claiming damages depends on whether there is ‘illegality’ in the poaching act. ‘Unlawful poaching’ refers to poaching that deviates from social decency and is carried out in an extremely treacherous manner.

Treachery means betraying trust or promises.

In other words, employee poaching that deviates from general social norms and betrays trust or promises is considered illegal.

To claim damages, the company must prove that the employee poaching act was illegal and that the infringement of the rights or interests of the company to which the employee belonged was due to that act.

Furthermore, even if the employee poaching is prohibited by the provision of the non-competition obligation (described later) in the employment rules or if a special contract has been made, damages can be claimed regardless of illegality.

Article 709 of the Civil Code (Damages for Tort)
Anyone who intentionally or negligently infringes on the rights or legally protected interests of another person is liable for the damages caused by this.

How is Illegality Determined?

Whether there is illegality in employee poaching is determined by comprehensively considering the following four items, according to a precedent (Tokyo District Court, February 25, 1991 (Heisei 3)).

1. The position of the employee who is changing jobs in that company
2. Treatment and number of employees within the company
3. The impact of the employee’s job change on the company
4. The method used to encourage job change (whether or not notice of resignation was given, secrecy, planning, etc.)

The following are examples of employee poaching acts that have been pointed out as illegal because they deviate from social decency and are carried out in an extremely treacherous manner.

1. Planned and executed the poaching of employees in secret from the company
2. Caused a large number of employees to change jobs without notice, causing disruption to the company’s business
3. Convinced employees to transfer to a competing company in a hotel room
4. Provided false information to employees that the company was going bankrupt, inhibiting their free will
5. Provided money or other benefits to encourage employees to transfer to a competing company
6. Caused employees to change jobs without making a resignation statement or handing over their duties

Non-Compete Obligations and Employee Poaching

What are Non-Compete Obligations?

Non-compete obligations refer to the duty of employees not to engage in competitive activities such as “changing jobs to a competing company” or “establishing a competing business”. Employee Poaching can be included in these competitive activities.

Typically, this obligation is established through a pledge at the time of joining the company or as a non-compete special clause in the employment rules.

The purpose of non-compete obligations is to protect the interests of the company. The interests referred to here are not only trade secrets under the Unfair Competition Prevention Act (Japanese Unfair Competition Prevention Act), but also technical secrets and business know-how are often considered to be included.

Highly confidential internal data includes personal information such as customer information, so protecting this is also important from a privacy perspective.

For more details on the “non-compete obligations” in employment contracts, please refer to the following article.

Related article: Prohibition of competition in employment contractsCan changing jobs to other companies in the same industry be prohibited?

Employee Poaching That Could Be Illegal and Claims for Damages

Job Offers by Current Employees

It is generally not a problem if a current employee tries to entice another employee within the scope of a “job offer”.

However, employees have a “duty of good faith” under their employment contract not to unfairly infringe on the legitimate interests of the company. Therefore, if a current employee engages in illegal employee poaching, it may be possible to claim damages for breach of the duty of good faith under the employment contract.

At the same time, it may also be possible to claim damages for tortious acts against the company that conspired with the employee to carry out the employee poaching.

If the employee who made the offer is a director, they may also be accused of breaching their duty of loyalty.

Directors have a responsibility for the management of the company and, in addition to their “duty to avoid competition”, they have a “duty of loyalty” to protect the legitimate interests of the company without seeking their own profit.

Employee Poaching by Employees Who Have Changed Jobs

Employee Poaching by former employees who have changed jobs is basically the same as poaching from another company, as they do not have a “duty of good faith” under their employment contract.

In this case, the possibility of claiming damages against the company that carried out the poaching is determined by the presence or absence of “illegality”.

However, if there is a special agreement in the employment rules or elsewhere prohibiting competition after resignation, employee poaching may be considered a competitive act, and the former employee may be held responsible for breaching the duty to avoid competition.

Employee Poaching by Directors Who Have Changed Jobs

The duty to avoid competition stipulated in the Companies Act does not apply to directors after they have changed jobs. However, if they have promised not to engage in competitive activities in their contract with the company, they may be subject to claims for damages for poaching to a competitor.

At the same time, it may also be possible to claim damages for tortious acts against the company to which the former director belongs, and of course, the same applies if they engage in illegal poaching.

Employee Poaching by Other Companies

Whether or not it is possible to claim damages when an employee is enticed by another company depends on the presence or absence of “illegality”. However, employee poaching by a “third party” with no contractual relationship is often not considered illegal.

Also, “headhunting”, which is often heard of, is slightly different from poaching in that there is an intermediary and the management level is the target of recruitment. However, this is also generally not illegal, as it is a practice that is generally accepted to some extent in society.

However, if the method of headhunting deviates from social norms and causes significant damage to the company being headhunted, it may be possible to claim damages under Article 709 of the Civil Code in exceptional cases.

Who is Liable for Damages in the Event of Employee Poaching?

So, if an employee of your company changes jobs due to illegal employee poaching, can you claim damages against the employee who has changed jobs?

Unfortunately, as a general rule, you cannot. This is because job changes are included in the freedom of occupational choice, which is guaranteed by the Constitution.

Also, it is reasonable to think that you cannot, in principle, claim against the company that recruited the employee, because talent acquisition in a company is a free competition.

However, of course, these apply only when there is no illegality in the employee poaching.

The Difficulty of Proving Losses Due to Employee Poaching

If employee poaching is found to be illegal, how much can a company claim in damages? This is a difficult question to answer. The reason is that it’s extremely challenging to determine the damage a company suffers due to an employee being poached.

After an employee has been poached and left the company, there could be several reasons why the company’s performance has declined. Therefore, it’s impossible to definitively establish a causal relationship between the poaching and the decline in performance.

As a result, the scope of acceptable claims is likely limited to the decrease in sales from the clients lost due to the poaching, and the cost of securing replacement personnel for the poached employee.

Cases Where the Illegality of Employee Poaching Was Denied

Just as a company has the freedom to choose its employees, employees also have the right to freely resign from their current company and join another.

Even if a large number of employees resign en masse and cause damage to the company, this principle does not change.

Furthermore, even if the legality of poaching is disputed, there are cases where its illegality is denied and it does not become the subject of a claim for damages. Here, we introduce two case examples for reference.

The Freelance Case

The Freelance Case (Tokyo District Court, November 25, 1994 (Heisei 6)) is a case where 12 delivery drivers and office workers resigned from a motorcycle courier company of about 20 people due to the unreasonable personnel decisions of the management, causing internal chaos, and established a new company.

In this case, it was not recognized that there was an obligation to refrain from competing after resignation, and the illegality was denied.

The Minato Seminar Case

In the Minato Seminar Case (Osaka District Court, December 5, 1989 (Heisei 1)), Instructor B, who was in a central position at Cram School A, opened a new cram school C nearby after resigning, and 5 out of 8 instructors who were working at Cram School A agreed with Instructor B’s plan and voluntarily transferred to Cram School C.

In this case, since the transfer of the instructors was voluntary, it could not be said that the defendant poached them, and the establishment of the cram school was within the proper range of free competition, so the illegality was denied.

Conclusion: Consult a Lawyer if You’re Struggling with Employee Poaching Issues

Poaching can sometimes cause serious damage, such as losing excellent employees who have been nurtured over time or sales representatives with clients. However, whether it is illegal or whether damages can be claimed depends on various circumstances and cannot be determined without careful consideration.

In addition, it is difficult to definitively determine the extent to which damage claims can be recognized, given that poaching is not inherently illegal and even if it is, the illegality varies.

If you are faced with malicious poaching that affects your business, we recommend consulting with a law firm that has specialized legal knowledge and extensive experience as soon as possible to receive advice on how to respond.

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