Assuming the information provided to be complete and true, I have to come to the conclusion that there is no fault on part of Party B.

Bearing in mind I haven't studied employment law since..ooh 1994 this cannot be relied on as 100% accurate. Also I'm having to make some assumptions because:

What country did this take place?

What are the specifics of the contract between Party A and Party B?

Assuming UK:
1. Was the vacancy that Party B wanted to fill properly advertised and Person X considered amongst other candidates? If not Party B is possibly at fault with the law but not Party A.

2. If the contract specifically stipulates that Party B may not approach any member of staff at Party A, with regard to vacant positions. Then indeed Party A is at liberty to cease the contract (if there is provision for such action in the contract) or pursue legal proceedings for breach of contract.

Person X was perfectly at liberty to serve notice, just as Party A is at liberty to make the position redundant.

Thanks for your input, aravind585 and hollystyles.

We're in the U.S., and the "contract" was an ongoing business relationship rather than a formal contract. I misstated that in my original post. We've worked with this company for years on an as-needed basis.

I must admit that I am Party A, and I'm furious about this situation. We don't think that Party B had a position open, and that they "created" a position as an avenue to recruit our employee. We felt that Party B had a major conflict of interest, since the employee in question had cut out about half of their revenues from our firm since his arrival at our firm. By hiring him away from us (with a free real-world skills test and evaluation by working with him on our dime), they destroyed our own internal IT capacity, which means that we have to outsource all of it again, presumably to them in their thinking.

Then Party B apparently planned to send this employee back to us as a consultant, charging us roughly triple to access this employee compared to what he was costing us internally (i.e., consulting rate versus internal employee rate).

Party B is insisting that there's nothing wrong with what they did, but they were fired within 24 hours, so I guess it doesn't matter at this point.

We have nothing against the employee, because he's certainly got the right to quit. Our wrath is aimed squarely at Party B.

I was really just wondering how common this is. My firm does consulting, and as a matter of policy we won't even discuss employment with an employee of a client. Too much risk of losing the client. I assumed that all consultants maintained this policy. Is it different in the IT world?

That's a very interesting scenario. It is not uncommon in many areas of business, not just I.T. Particularly areas where the skill supply is in a period of scarcity.

Hiring technical people can be a long and expensive task, making the temptation to headhunt someone you know well all the more appealing.

I must say though, I agree there is a tinge of bad ethics in your tale. It's certainly ungentlemanly in my opinion that there wasn't a more open and honest approach to the situation, considering you were their customer.