A number of banks have been reported to have taken advantage of the current state of the financial services industry by poaching key individuals and teams to bolster their business. This Q&A examines the possible legal ramifications.
Q Why is this happening? Isn’t the recruitment market stagnant?
A It is clear that there is still a market for talent even at a time of mass job cuts, especially in niche and profitable areas. Finance is in short supply due to the credit crunch, so organisations will look to acquire clients and business in a way which avoids formal acquisition costs. This can be achieved through the acquisition of a team, or by recruiting key individuals who, in a buoyant market, might have been out of reach.
The Financial Services Authority recently published a draft Code of Practice which will severely inhibit the ability to award generous remuneration packages on flexible terms. It was previously thought that all FSA regulated entities would be bound by the code, but this is now likely to only apply to a limited number of them. This means that smaller banks may become a more attractive employer and labour fluidity could increase.
Q What can and can’t employees do when leaving to join a competitor?
A An employee can, of course, look for and accept a new job. They must, however, remain loyal to their employer during employment and this includes an obligation to promote, and not damage, the employer’s business. So employees cannot divert business or opportunities while they are employed. Once they leave employment their obligations are significantly diluted. They must not retain or use their ex-employer’s property or certain types of confidential information. They are, however, free to compete unless they have agreed to comply with enforceable post-termination restrictions.
Q Can employees persuade others to leave with them?
A It is arguable that no employee should actively encourage others to leave due to the duty of loyalty. Furthermore, directors and some senior employees would be under a duty to inform their employer if they are aware that other employees are thinking of leaving. A recent case held that this duty to inform will also apply to more junior employees because it falls within the scope of the duty of loyalty. This is a significant development in the law which employers may be able to use to their advantage and which makes team moves difficult to execute – at least with any speed.
Q Does being a director/fiduciary make any difference?
A A director or a senior employee owes what are known as fiduciary duties. These are more onerous than duties owed by an ordinary employee and severely restrict what an employee can do during their employment to facilitate a team move. For example, they may be required to disclose the fact that they were in discussions with a competitor to join them and will definitely be under an obligation to tell their employer if they know others are leaving or being poached. If they were involved in mature business opportunities during their employment, they may be prevented from exploiting these when they move.
Q What potential problems are there for the poaching entity in relation to team moves?
A There may be problems if the poaching entity induces any breach of contract on the part of an employee. Injunctions, which prevent certain activity, may be granted against an employee and their new employer. As it is likely that the new employer will have greater resources than the employee, there is a clear incentive to look for a way to involve them.
Q How should you tackle a team move, bearing in mind the stated risks?
A The courts are increasingly taking a robust view in this area and have been particularly willing to enforce obligations and pin blame on those responsible for co-ordinating teams of people leaving. It is common knowledge that it is now difficult to properly execute a team move without taking risks. Any risks should, however, be calculated and measured and can be reduced. Obtaining specialist and strategic legal advice at an early stage is crucial. There are ways to navigate a number of the risks, but if you act too late the damage may already have been done.
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Matthew Whelan, solicitor, Speechly Bircham
