Sunrise Brokers LLP v Rodgers is the tale of a broker who gambled in his decision to leave his employer for a competitor. He rolled the dice, choosing not to give notice and refusing to work. The employer responded: affirming the contract and withholding salary. The employee lost.
The case reconfirms that if the employer takes a tactical approach, it will, employment contract permitting, be able to delay an employee joining a competitor. And, in some (but not all) instances, not pay salary during that period.
Protecting your business when an employee leaves
When an employee, especially a senior one, resigns to join a competitor, businesses will want to ensure they have taken appropriate steps to protect their business interests. Those interests will cover elements from confidential information to customer connections and employee relations. At this point attention turns to the employment contract. Detailed confidentiality clauses and properly tailored restrictive covenants come to the fore. Behind the express words of the employment contract, where the employee has director or, sometimes, other sufficiently senior status, fiduciary obligations add an extra layer of defence for the employer.
These obligations provide valuable deterrents and a toolkit for protecting the business via litigation if needed.
The limitations of post-termination restrictions
Litigating business protection claims is notoriously difficult and expensive. And particularly where the remedy sought is an injunction, perhaps to stop the ex-employee from joining a competitor or soliciting clients. In large part this is because post-termination restrictive covenants are, on their face, void in restraint of trade. No court will uphold a covenant unless it protects a legitimate business interest and goes no further than reasonable in doing so. The court will scrutinise the detail of the relevant covenant and, in particular, the length and breadth of the restriction. Even if a covenant is enforceable on paper, the court is not bound to order an injunction and will balance the interests of the employer and ex-employee in deciding whether to do so.
The magic of the continuing employment contract
In many instances, the option to place the employee on garden leave can be a practical saviour for an employer; it is usually an easier protection to enforce as compared with a restrictive covenant. As we discussed at our October seminar on this topic, garden leave has the advantage of keeping the employee out of the market whilst maintaining their employment contract. The employer can take advantage of that subsisting relationship, including the duty of good faith and fidelity on the employee. Ordinarily, the employee cannot join a competitor during the life of the employment contract. This means a well drafted garden leave provision – coupled with confidentiality protection – can often suffice. It reduces, and sometimes removes altogether, the need to rely on any post- termination covenants for the period after garden leave.
The Sunrise Brokers case illustrates the magic of the continuing employment contract in a slightly different context to garden leave. Mr Rodgers attempted to leave his employment with Sunrise immediately, in breach of his contract which included a 12 month notice period. He intended to join a competitor. He never returned to work for Sunrise. Sunrise discontinued Mr Rodgers’ salary because he was unwilling to work. But – and this was crucial – they refused to accept his repudiatory breach of contract in failing to give notice. In refusing to accept the breach, Sunrise kept the employment contract alive. They looked to enforce the contract by seeking a declaration that Mr Rodgers was bound by its terms and an injunction to stop him joining the competitor.
The Court of Appeal upheld the High Court’s decision to grant a 10 month injunction (encompassing both a period of continued employment and a period of post-termination restriction). The effect was that, during the relevant period, Mr Rodgers could not join the competitor. As a matter of long- standing principle, the court will not grant an injunction if the effect would be to compel an employee to work. Mr Rodgers had argued that the injunction would have this very effect. The court disagreed. Even though Mr Rodgers was not being paid by Sunrise and could not take up other employment for the duration of the injunction, this did not mean he would “starve or be idle”. On the specific facts, the court was satisfied that the injunction did not have the effect of compelling Mr Rodgers to work for Sunrise.
Action points for employers
This case is a useful tool in the armoury for employers who are faced with a departing employee who refuses to give adequate notice in repudiatory breach of contract. But we would give three notes of caution.
Take legal advice
Cases in this area turn on their facts and the specific wording of any relevant contractual provisions. For example, where the employment relationship has wholly broken down, it may be easier for the employee to treat herself as discharged from the employment contract without having to wait out the notice period. Early advice on this detail can help in planning and implementing a clear and effective strategy.
A key part of Sunrise’s strategy was that it did not accept the employee’s breach and instead affirmed the contract. What is said and done on and following resignation is key. For example, an employer who sends a P45 to the employee will have an uphill struggle to persuade the court that the contract has not terminated.
Think carefully before stopping salary
Critically, it was Mr Rodgers who refused to work and it was this refusal which led Sunrise to stop salary payments. Had it instead been Sunrise which had placed Mr Rodgers on garden leave it almost certainly would have been required to maintain salary during that period.
In this case, Mr Rodgers had not been able to convince the court that the combined effect of being kept from working elsewhere coupled with not being paid during his notice period would cause him serious financial hardship. Employees will not always find this so difficult. Where there is such potential hardship, the court might decide an injunction should be refused on the basis that it would have the practical effect of compelling the employee to work for the current employer.