We hired an employee and received a letter stating that they have a non-compete with their prior employer. What should we do?

Hire a lawyer (to keep internal communications privileged and confidential) to quickly investigate the situation and evaluate both your and the employee's liability.
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It is tempting for a business to believe that a new employee’s disputes with their prior employer is not its problem. But that would be a mistake.

For example, if a business knows or becomes aware that an employee if violating a non-competition agreement, and does nothing, then it might be liable for tortious interference with that employee’s contract with its prior employer. Even if the business has no legal liability, it most likely will have to answer discovery regarding the employee’s new duties.

If a business receives a letter accusing a new employee of violating their duties to their former employees, it should quickly investigate the situation and determine both it and the employee’s liability. Such investigation is best done by a lawyer so that the results can be kept confidential under the attorney work product privilege. (Otherwise, the results and communications might just become evidence that needs to be turned over to the former employer).

After the investigation, a business may decide that it needs to limit the employee’s duties while the dispute is still being resolved. Or, it may decide that there is a valid legal defense and choose to oppose the former employer’s demands.

Of course, a business can sometimes avoid legal troubles by doing some due diligence up front and using common sense. For example, if non-competes are common in the industry, and the employee sells themselves as able to bring a large list of customers, the business can ask about any contractual obligations before making the hire.