The uncertainties which a merger or acquisition can create often act as a catalyst for team moves, as both employers and employees can exploit the situation.
Therefore, employers involved in mergers and acquisitions must be vigilant and proactive in how they seek to retain top performers and their teams, particularly in the months leading up to and in the immediate aftermath of a deal. Conversely, this kind of activity can result in opportunities for employers to acquire top performers and their teams who may have become disillusioned or felt uncertain about their futures.
For any business to thrive it must protect its interests from competitors. The impact of losing a top performer and their team to a competitor can be extremely damaging. The effect is not normally limited to individual performers or teams but can also result in the loss of:
- other staff; and
- valuable confidential information.
Such business interests will inevitably have been hard earned over a considerable period and are unlikely to be easily replaced in the short term.
Therefore, it is fundamental to any successful business that effective protections are implemented at the start of employment relationships and maintained throughout. Likewise, employers that wish to turn poacher must proceed with caution and plan the raid carefully to try and minimise the risk of costly and time-consuming litigation.
This article focuses on the measures which employers can take to try and limit the risks and detrimental effects of a potential team move and the steps necessary to plan and execute a successful poaching exercise.
There are several steps that employers can take to mitigate the risk of their employees leaving to join a competitor. Many employers already offer incentive-based remuneration packages which aim to align their longer-term interests with those of their employees. While such long-term incentive plans, together with a clear communication strategy, can assist with retention, employers should actively consider additional measures, such as:
- Including bespoke post-termination restrictions in employees' contracts to prevent them from joining a competing business or soliciting former colleagues to join a competing business. Some employers also include covenants to prevent groups of ex-employees from working together for a competitor.
- Including other express terms which require employees to:
- disclose any information which may adversely affect the employer's interests (eg, plans to compete or approaches from competitors);
- provide any prospective employers with a copy of the employee's contract; and
- disclose a potential new employer's identity once an offer has been received.
- Identifying which employees or teams are most likely to be tempted to remove confidential information or attempt to take customers or clients. For example, roles which have the most contact with clients and access to confidential information (eg, sales roles or roles in which the employee is involved in IP creation, such as IT or software developers) are likely to pose the greatest risk.
- Ensuring that the employer does not inadvertently breach employee's contract, as this will render the post-termination restrictions and contractual confidential obligations unenforceable. For example, employers should ensure that they have the contractual right to suspend or place employees on 'gardening leave' before doing so and should continue to provide employees with all contractual benefits, even if it is suspected that they may be contemplating a team move.
- Taking preventative steps to ensure that if employees leave, they cannot use any confidential information to assist a competitor's business. This means ensuring that any confidential information is subjected to appropriate security measures (eg, password protecting and limiting accessibility) and implementing reliable IT systems to track how and when data has been accessed. This enables the investigation of concerns to take place at an early stage when action can still be taken.
In a team move scenario where one or more employees who work in the same business decide to leave and set up in competition with their existing employer on their own account or join one of their existing competitors, time is of the essence and the existing employer must act quickly and decisively to protect its own business interests.
Once an employer has established that departing employees have acted in an unlawful manner (by breaching either express terms or implied terms of their contract), there are several protective steps that it can take to try and prevent or mitigate the damage. For example, an employer can:
- investigate potential unlawful conduct, including:
- interviewing relevant employees and other employees who owe fiduciary duties (ie, to act in the company's best interests, to not make secret profits or to avoid any conflicts of interests) to the employer (who should provide truthful and accurate responses); and
- conducting a forensic IT analysis (being careful not to breach any applicable privacy laws – this will include the Personal Information Protection Act when it comes into force);
- send letters before action to departing employees, the new employer and sometimes other employees who may be vulnerable to being poached;
- apply for interim injunctive relief to enforce express or implied contractual rights, consider a springboard injunction to prevent the team or the new employer from taking advantage of an unlawful springboard as a result of past unlawful conduct (typically a breach of confidentiality, although this has been expanded to cover unlawful acts such as breaches of good faith or fiduciary duties);
- apply for orders for delivery up of documents and other material belonging to the existing employer to prevent its misuse and to further investigate suspected wrongdoing;
- seek to negotiate a commercial settlement, typically involving the departing employees offering undertakings to the existing employer or the court, to desist from further unlawful activities; and
- continue with legal proceedings to obtain final remedies against team members and the new employer for final injunctive relief or financial remedies, including compensatory damages or an account of profits.
In practice, an important tactical decision is whether to take action against only departing employees or both employees and new employers for the tort of inducing a breach of contract. This is another reason why it is useful to ensure that contracts contain express obligations on employees to draw post-termination restrictions and confidentiality obligations to the attention of prospective employers and inform employers if an offer of employment has been accepted. This may support an assertion that the prospective employer had been notified of the post-termination restrictions.
As is clear from the issues already raised in this article, prospective employers should take care when recruiting senior individuals and teams from competitors. As noted, the primary concerns are that:
- individuals may face enforcement action aimed at preventing them from working for a new employer for a period or seriously limiting their effectiveness in a new role; and
- new employers may face a claim that they have induced an employee to breach their contract.
However, there are several important steps that prospective employers can implement to try and minimise enforcement action risks and disruption to their recruitment processes, including:
- taking their time to understand the legal obligations (both express and implied) to which the prospective employees are subject, including what types of information prospective employees possess and whether this is covered by any implied or express confidentiality obligations;
- considering seeking legally privileged advice as to the potential enforceability of any express post-termination restrictions at an early stage in the recruitment process;
- engaging an external third-party recruitment business to handle the recruitment process to demonstrate that the process was conducted at arm's length and remind prospective employees to comply with their legal obligations;
- avoiding creating any potentially damaging documentation evidence of potential unlawful conduct and limiting written communications; and
- if the matter appears likely to lead to litigation, considering who will act for the parties (to avoid any potential conflicts) and determining whether there is an acceptable compromise which could be offered to the former employer to avoid the costs and risks of litigation and enable the recruitment to go ahead.
While there are several potential risks which employers can face at the hands of former employees, these risks can be significantly mitigated provided that they are:
- carefully considered at the outset of an employment relationship; and
- properly addressed in the contracts which govern a relationship.
Likewise, for poachers, while the stakes are inevitably high, it is possible to significantly reduce litigation risks and achieve the desired outcome, provided that the poaching exercise is carefully planned and executed.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.