Staff who come in from the cold

Recruiting teams from rivals is often the only realistic way of resourcing fast-growing operations. But there are many practical factors to consider, warns Sam Whitaker

For many businesses, especially in the service sector, their staff are their most valuable asset. For companies wishing to expand rapidly into new areas of business, or extend their presence in existing areas, the recruitment of teams of employees from rival organisations is often the only realistic way to resource such operations quickly.

Highly publicised cases such as that of Nicola Horlick and Deutsche Morgan Grenfell, and Credit Suisse and James Capel, have shown how costly and messy such a process can be.

There are certain practical steps that should be taken by a company seeking to poach a team of employees, and also a number of reactive and preventive measures that can be taken by the company from whom the team is defecting. What follows is a summary of the key points and practical suggestions, but it would be wrong to discount the commercial and managerial considerations as well as the possibility of settlement which should also be taken into account.

The poacher

Initial preparations

There are various steps that need to be taken by the recruiting company before the individuals resign from their existing employer.

Review the documents

To begin with, the new employer should carefully review all current contractual documentation – including employment contracts, staff handbooks, and compliance documentation – taking careful note of long notice periods, garden leave clauses, confidentiality provisions, prohibitions on soliciting clients and/or employees, prohibitions on working for a competitor for a specified period, and provisions obliging the employee to notify his employer of any offers of employment made by third parties.

Assess the risks

Next, an assessment needs to be made of the likelihood of any post-termination restrictions being enforceable. It should be borne in mind that, unless the restraints are obviously unenforceable, it may be relatively easy for the ex-employer to obtain an interim injunction. This is an emergency court order which may prevent the team from working for the poacher until the court can hear all the evidence relating to the enforceability of the particular restraints at a full trial.

Whether restraints are obviously unenforceable often depends on their scope. For example, if a “non-solicitation of employees” clause extends to all employees rather than just senior staff it is likely to be unenforceable. Equally, if a “non-solicitation of clients” clause is not limited to clients with whom the individual has had contact in a period leading up to termination, it too is likely to be unenforceable.

If there is a significant risk of an interim injunction being granted, an assessment must then be made of whether the clients with whom the team were dealing will still be likely to move their business with the team as and when the injunction expires. The risk in those circumstances is that the ex-employer will, in the meantime, have an opportunity to cement relationships to persuade the clients not to follow the team.

It is not unlawful for a company to entice employees away from another company. But if the enticement encourages or facilitates the employees to breach their contracts, including post-termination restraints, the ex-employer could commence proceedings for inducing breach of contract – or, less commonly, for conspiracy – against the poaching company. The poaching company should not encourage the team to breach their duty of loyalty or request them to disclose confidential information or fail to serve out their notice, unless there is a clear breach of contract by the old employer.

Do’s and don’ts for employees

Employees owe a duty of loyalty to their employer until their employment ends. In the period leading up to their departure the employee’s activities can significantly affect the ex-employer’s chances of obtaining an injunction. The team should be advised of the following do’s and don’ts:

– Comply with contractual terms, such as notice periods, confidentiality and restrictive covenants, in full.

– Do not undertake any work relating to the defection in the employer’s time or using its facilities.

– The solicitation of employees to move may breach contractual – or, in the case of directors or other very senior employees, fiduciary – duties. While a team of similar status may decide to leave en masse, a senior employee who persuades his juniors to move is likely to commit what amounts to a breach.

– If there are no garden leave provisions in the employment contracts, the employees should be briefed on how to react if the employer attempts to impose garden leave without their consent.

– Do not solicit clients to move their business. Until their departure employees have a duty to help retain clients for their employer. It is probably acceptable to respond to a client’s enquiry about where the employee is going.

– Do not misuse confidential information such as copying or intentionally memorising lists of customers.

– Do not discuss the move, in particular by e-mail or telephone, inside the office.

Implementing the team recruitment

Once the preparatory work has been completed, thought should be given to planning the individuals’ departure dates. Senior employees may have longer notice periods than juniors. Sometimes there may be advantages to bringing across more junior staff first. Clients may be prepared to switch their business to the new employer to be handled by those junior staff in the short term, knowing that the more senior employees will follow shortly. If the ex-employer resorts to legal action to prevent its senior employees from departing, it may face difficulties if significant clients have already defected and are being serviced by those junior staff.

In addition, the poaching employer should protect itself by making offers of employment expressly conditional on the team members complying with their existing terms and conditions.

The team members’ new contracts of employment should also contain adequate protection for the new employer, for example restrictive covenants/garden leave.

Reacting to action by the ex-employer

If the employees have left in breach of restrictive covenants and/or other contractual provisions, or fiduciary duties, the ex-employer may commence legal action, including a claim for an injunction. Generally, it is not difficult to obtain an interim injunction pending a full trial on the merits.

The ex-employer merely needs to establish that, at the full trial, there would be at least an arguable case that the particular provision would be enforceable and that, in the meanwhile, the balance of convenience lies in favour of restraining the employees from breaching them.

There are ways to reduce the chances of an interim injunction being granted. For instance:

– Consider whether undertakings be offered to weaken the employer’s case, for example not to use or disclose confidential information or solicit significant clients. The ex-employer may then be unable to justify an injunction.

– Consider informing the ex-employer when the team starts work. If the ex-employer then delays before seeking an injunction, it may have difficulty justifying to the court why it needs such an “emergency” measure.

– Consider whether a negotiated settlement is possible. For example, would the ex-employer accept a sum to “buy out” the remainder of the employees’ contracts?

It may also be worth investigating whether any information which the ex-employer alleges is confidential is in fact so. For example, can the identity of customers – which is often claimed to be confidential – also be ascertained from newspapers or trade publications? This may undermine any claim by the ex-employee based on alleged misuse of confidential information.

The gamekeeper

How can the employer reduce the risk of and deal with a team defection? The two key steps are to ensure that adequate contractual protection is set in place beforehand, and that the employer reacts in a manner that does not compromise the company’s position.

Putting contractual protection in place

One possibility may be to increase employee notice periods. But this can be risky. If an employee leaves and refuses to work out the notice period, the courts will not force the employee to continue to work. The employer will, in those circumstances, be left with an action for damages which may, realistically, be difficult to pursue. Also, consider garden leave provisions.

– Provisions to prohibit the removal or use of confidential information after employment has terminated should also be considered. About such provisions, the common law only prevents the ex-employee from disclosing the ex-employer’s trade secrets or equivalent information. Although there remains some uncertainty as to whether a clause prohibiting the disclosure of “mere” confidential information – information which, although confidential, is not sufficiently so to qualify as a trade secret – is enforceable, employers are best advised to include such clauses.

The most effective contractual method of preventing the loss of clients and unauthorised use of confidential information is to insert tailored post-termination restrictive covenants in place. Types of restrictive covenants for consideration include:

– Non-solicitation of clients. Such clauses should be limited to clients with whom the employee had contact during a specified period before termination.

– Non-dealing with clients. Such clauses have a significant advantage over non-solicitation clauses in that they merely require the ex-employer to show that the individual has had contact with the client, rather than providing evidence of solicitation. Solicitation can, in practice, be extremely difficult to prove since it requires evidence of the individual having made an initial approach to the client.

– Non-solicitation of employees. In general, such clauses will be unenforceable unless they are limited to the solicitation of senior employees only.

– Non-competition. Such clauses, if properly drafted and genuinely necessary to protect customer connections or trade secrets, will be enforceable. Used more often where clients are not readily identifiable, these clauses should be drafted as narrowly as possible, taking into account the size of the employer’s business, its area of operation, the employee’s role and the extent of the employee’s interaction with clients and customers.

Restrictive covenants are generally unenforceable unless shown to be necessary to protect the employer’s legitimate business interests, such as goodwill or trade secrets. It is also necessary to show that the restrictions are reasonable, going no further than is absolutely necessary to protect the interests of the business. The narrower the restriction, the more likely it is to be considered reasonable and the more likely it is to be enforced.

Preventive steps before a suspected defection

If the employer suspects a team may be about to defect, it needs to gather evidence to establish whether that suspicion is well-founded and, if so, to determine whether the individuals have been soliciting clients or employees. The employer should consider:

– Monitoring employees’ correspondence.

– Monitoring employees’ e-mails and telephone calls. Provided that employees have been warned, perhaps in an employee handbook, that e-mail and telephone calls may be monitored, then the employer should be able to do so without consequence. However, without such notification, regular monitoring may amount to a breach of the implied duty of mutual trust and confidence, thus allowing the employees to resign and claim constructive dismissal. This point has not yet been tested.

– Monitoring expense claims. This should include receipts submitted and credit card records. It may reveal an increase in client business lunches, possibly indicating which clients have been solicited.

– Tracking the employees’ movements. Clearly this is an extreme step but it may be appropriate if the stakes are high.

– Speaking to other employees or clients who may have been approached. Obtaining information ahead of the formal resignations may allow the employer to retain a greater degree of control. It can then start looking for replacements, bolster client relationships, confront the employees and bring the matter to a head at its, rather than the employees’, convenience. If the employer wishes to retain the employees it may have the chance to review the team members’ packages and perhaps offer them enhanced salaries or benefits. It may also provide an opportunity to strip key individuals out of the team, by offering those individuals enhanced packages or positions.

Reacting to a defection

So how should an employer faced with a team resignation react? The two key points are that the employer must act without delay, as failure to take swift action can severely weaken the chances of any successful court action; and that the employer must not breach the contracts of employment of the individuals.

Subject to that, the employer should immediately gather all the individuals’ contractual documentation and then:

– Consider isolating the team from clients, other employees and confidential information. The most common way of doing this is to put the employees concerned on garden leave or assigning them different duties. As discussed above, however, the employer needs to ensure it has an express right in the contract enabling it to do so, otherwise its action may amount to a breach of contract.

– Retrieve confidential information. The employer should consider requiring all team members to return all confidential information in their possession, including copies. Steps could also be taken to remove access to confidential information via computers at home. Care needs to be taken, however, that this does not amount to a breach of the duty of trust and confidence.

– Remind employees of restrictive covenants. The employees should be reminded of any restrictive covenants in their contracts.

– Notify the new employer of restrictive covenants. It is often advisable to put the employees’ prospective new employer on notice of any restrictions. If the new employer is on notice but, nonetheless, facilitates the individuals in breaching the restrictions, this may give the ex-employer an action for inducing a breach of contract against the new employer. Equally, putting the new employer on notice may make it wary of employing the individuals and more amenable to a negotiated settlement.

Sam Whitaker is an employment law solicitor at Freshfields.

Garden leave provisions – the current position

Garden leave – where the employer requires an employee to remain at home during the notice period – has become an increasingly common way for employers to try to isolate employees from clients, fellow employees and sensitive information once the employee has handed in his notice.

To put an employee on garden leave, the employer must include an express provision in the contract of employment to allow it to do so. If an employer does not have an express right to put an employee on garden leave, any attempt by the employer to put the employee on garden leave is likely to be a repudiatory breach of contract. This will enable the employee to leave immediately and claim constructive dismissal. In these circumstances, the employee will not be bound by any post-termination restrictive covenants in the contract. 

To be able to enforce any part of garden leave, the employer will also need to show that a period of garden leave is necessary to protect confidential information or customer connection.

Court action?

Where some or all of the team are in breach of restrictive covenants or garden leave clauses, the ex-employer will often seek an interim injunction restraining the ex-employees from breaching the contractual restraints – and the new employer from inducing a breach by them – until a full trial of all the issues can be held.

It is relatively easy for the ex-employer to obtain an interim injunction. But the employer will have to give an undertaking to the employees that, if the injunction is granted but a subsequent hearing finds it should not have been given, the employer will make good any damage caused to the individuals as a result of the injunction being imposed.

Even if the employer is unsure whether it would be successful at the full hearing, it may still consider seeking an interim injunction, notwithstanding the requirement to give the undertaking. Obtaining an injunction may assist the employer to negotiate the team’s exit on more favourable terms than would otherwise have been available to it. 

The employer may also consider bringing a claim against the new employer for inducing a breach of contract.

The new employer should bear in mind that in the event that it loses in court, it could end up paying two separate sets of legal fees – for the ex-employer and the employees’ lawyers.