Chris Evans of ILM, a lot of senior executives and managers fail to consider the legal ramifications of talent poaching.
“Poaching happens all the time and often without anyone involved thinking of the legal ramifications,” agrees Alex Denny, a leading employment lawyer at Faegre Baker Daniels. “The problem is employers have very little protection from the law in terms of what employees can and can’t do after the termination of their employment. Their only assured protection is duty of confidentiality, which means the departing employee can’t reveal any trade secrets or vital information about the company.”
But this issue doesn’t end with a shrug of the shoulders and a dismissive “What are you going to do?”
Instead, there are two words that turn the whole debate on its head: ‘restrictive covenants’. All owners and managers will be aware of what these are and, if they’re wise, will have included them in employment contracts, particularly for more senior recruits.
The main and most common restrictive covenants are non-compete – the employee won’t go and work for a competitor – and non-solicitation of employees, clients, suppliers or agents. Others include non-interference with contractual relations and not presenting oneself as being affiliated with the company after leaving.
“The challenge for employers is that the courts don’t like these restrictions. They view them as being in breach of public policy on the basis that they are in restraint of trade,” adds Denny. “In order for the employer to demonstrate that the covenants should be enforced they have to show that they are reasonably necessary to protect a legitimate business interest.”
The courts have established that these ‘interests’ include protection of confidential information, and client and employment relationships. Then you get into how to introduce covenants that go no further than is necessary to protect the company’s interests. So, for example, with non-compete, trying to restrict someone from working for a rival organisation for 5 years is unlikely to cut the mustard. Broadly speaking, the most an employer is likely to get away with is 6 months, possibly 12 months for a very senior person who could wipe out the business if he moved straight to a competitor.
“You’ve got to put the covenants in place with care,” stresses Nicholas Lakeland, head of the employment and pensions team at law firm Silverman Sherliker. “You can’t restrict people for ever, and it’s generally hard to enforce non-compete within a restricted geographical area unless it’s someone special. The emphasis tends to be on non-soliciting and poaching.”
With these last covenants there is often a graduated approach. Again, for a senior figure meeting clients every week, a 12 month restriction is the limit at which it is likely to be upheld. Take a small step down to say the deputy sales director who may also have a 12 month restriction, but he might be on a lesser package and only deal with a certain strata of client, and so you might find 9 months is more likely to be enforced, according to Lakeland. Then the restrictions decrease at each level until you get to the graduate, who will have low or no restrictions.
Another way to limit a covenant and potentially have more success is to require there to be a link between the departing employee and the protected categories of current employees.
“Typically you’ll say something like ‘you will not approach senior employees with whom you’ve had serial dealings in the last 12 months of your employment.”
There’s also gardening leave to consider.
“This is for when employers are aware of an employee leaving and so put them on a forced separation during their notice period so they don’t have contact with clients,” explains John Palmer, the Senior Guidance Managing Editor at the government’s conciliation and arbitration organisation Acas.
It’s all in the drafting of the restrictions. If the employee signs the contract with these properly in place and then leaves and starts poaching employees then the employer has a good chance of enforcing the restrictions in court.
But the reality is that the large majority of companies either do nothing or send snotty letters to former employees complaining about their actions if they breach covenants. To drag them through the courts and enforce covenants is a time consuming and very costly process. It has to be commercially viable to do so, which is why most of the cases involve high profile former employees.
“I asked one client who was chasing a former employee who stole a client worth about £2,000 a year, do you really want to spend £10,000 with me on a restraining order? There’s no logic to it,” says Lakeland.
The nuclear option is getting an injunction against a former employee, which can cost anything from £50,000 to £100,000 just for the first hearing. Plus these are discretionary and only awarded on a full basis when proper evidence is heard, which takes time.
In the case of solicitation of clients there’s also the client’s view to consider. “What if the client says he doesn’t care about the covenants and wants to deal with the person who’s moved on? It raises an interesting issue in terms of regulation within each industry, especially if it’s about putting the client first. Is the non-dealing restriction in breach of regulation guidelines? It’s a thorny issue,” adds Denny.
It’s no wonder, therefore, that employers and their new employees continue their poaching game. Some even go to great lengths to disguise their dealings. Lakeland points to one case where someone actually set up a competitor company using a false name so they could steal clients.
But it’s important to point out that should an enforcement of restrictive covenants be successful in court, the former employee would most likely have to pay damages, and if they breach an injunction they can face jail time.
Employees also need to be careful about their actions on social media. A supposedly harmless post on LinkedIn saying you’re leaving X and moving to Y could be seen as solicitation.
“Some employers even include in their contract terms that employees be disconnected from existing clients and work colleagues on networking sites once they leave their employment. But this is a dangerous road to go down,” advises David Widdowson, a partner at legal and tax consulting firm Abbiss Cadres.
Furthermore, the new employer has to be careful they’re not dragged into any legal proceedings as a result of covenant breaches.
“If they knew (or should have known) that the employee they took on was subject to restrictions and hired them anyway, they can be charged with inducement to breach contract, which is serious. All parties involved need to be aware of their responsibilities,” concludes Denny.
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