Restrictive covenants have the potential to upset the recruitment of new staff at all levels of the professional hierarchy. The “top tips” below help to identify the key issues to bear in mind.
Tip 1: Establish what legal obligations and/or post-termination restrictive covenants apply to the employee in question
Ignorance of the terms of a prospective employee’s contract of employment and/or any post-termination restrictive covenants which may apply to them may be a defence, but a court may not accept that you did not know about the existence of any such terms or covenants. Failing to establish whether an individual owes obligations to their former employer, or indifference as to whether they do or not, may be sufficient to amount to a breach of contract. Including a warranty in any prospective employee’s contract (by which they confirm they are not in breach of their contract with their former employer) may help, but for those reasons set out in Tip 2 below, relying on any such warranty can be problematic if you also provide an indemnity.
Tip 2: Consider the implications of offering (or failing to offer) a prospective employee an indemnity to cover the legal costs and financial losses incurred upon any move, and/or any upfront sign-on payments
The prospective employee may refuse to move over to you without an indemnity because of the risk of incurring significant financial losses if they are pursued by their former employer for breach of their restrictive covenants. An indemnity may comfort a prospective employee in that respect.
You should nonetheless be aware that this may increase the likelihood of a court subsequently finding that you have colluded with the employee or induced them to breach their contract of employment. Departing employees, protected by a prospective employer’s indemnity, may not be as assiduous in complying with the terms and conditions of their contract as they might otherwise have been. Arguably the indemnity itself can be evidence of an intention to breach—why else would it be required?
Tip 3: Appreciate your disclosure obligations in the event of litigation
Telephone and mobile phone records, texts, instant messenger chats, meeting notes, emails, board minutes, memoranda etc. will (unless legally privileged) be disclosable if relevant to any subsequent court proceedings.
Tip 4: Take careful advice if you are considering entering into any discussion with prospective employees as a group
It is usually inadvisable to discuss with senior staff the recruitment of more junior employees, particularly while they are both still employed by your competitor. Senior members of a team may owe fiduciary duties to their employer. If they do, they will be required to act in their employer’s best interests (discussed below). The solicitation of junior employees is likely to constitute a breach of contract. Even obtaining information from senior members of the team about their junior colleagues, so as to decide who to approach, may lead to allegations that you induced a breach of contract, that the senior employees acted in breach of contract, and that you all conspired together.
Tip 5: Consider the status of the employees you are seeking to recruit
All employees owe a duty of trust and confidence to their employer requiring them to act in their employer’s best interests. Fiduciary obligations go further than this basic requirement. Where applicable, they require employees to put their employer’s interests above their own. An individual who owes fiduciary duties to their employer (such as a director or, depending upon the circumstances, a senior manager) may be obliged to inform their employer of any approach or offer of alternative employment they or any of their colleagues receive.
Further, these individuals may be considered critical to the business. Their restrictive covenants may therefore be enforceable for a longer period of time, or may be far reaching. For example, 12 month restrictions might be enforceable if an individual has a particularly close working relationship with the clients his/her employer is seeking to protect, or if s/he had signed some kind of goodwill agreement. Take extra care, therefore, where a prospective employee has entered into a business, shareholder or similar agreement with their former employer since their post-termination obligations may be more likely to be enforceable.
Tip 6: Be aware of your conduct vis a vis your prospective new employees
If you, as a prospective employer, act unlawfully it may be possible for the new employees you have recruited to argue breach of any contracts of employment which they have signed with you. This might arise if, after they have signed contracts of employment with you and given notice to their current employer, their current employer persuades them to stay. In this case they may be able to argue that your illegal and dishonest conduct in poaching them is such that they have no trust or confidence in you. The courts have previously held that in such cases the “cynical disregard for the law and for employees’ duties,” which was demonstrated by prospective employers, was such that the poached employees were not obliged to serve them.
Tip 7: Your treatment of prospective employees at the time of recruitment may affect your dealings with them in the event of their termination
If you demonstrate little or no respect for a prospective employee’s restrictive covenants, or the continuing obligations set out in their contract of employment with their former employer, you may find that if/when that individual comes to leave your employment, they show you a similar disregard. You may, therefore, not want to send a message to your employees that you do not respect their contractual obligations. The courts may not enforce your restrictive covenants if you have flouted those of the previous employer. After all, an injunction is an equitable remedy, and the courts will apply the principles of fairness and good faith.
Tip 8: Beware of encouraging employees to raise “artificial” constructive dismissal claims
The courts may look unfavourably upon contrived constructive dismissal arguments which have been raised by an employee with a view to circumventing their notice period or the post-termination obligations set out in their contract of employment. This is particularly the case if s/he has already secured alternative employment prior to resigning and bringing a claim. Prospective employers may be vulnerable if they are seen to have encouraged an employee to “manufacture” a constructive unfair dismissal argument and they may be accused of having induced a breach of contract as a result.
Tip 9: Consider whether it is appropriate to agree terms with the current employer
For example, you may agree to “buy” the business of, or share the revenue generated by, certain clients. In some situations, a former employer may seek to agree to share the revenue generated by certain clients with you, as a competitor, rather than lose the business of those clients in its entirety. Negotiating this type of arrangement may prove more economic for the former employer than engaging in a costly legal dispute to protect its business interests. However, you should seek legal advice before approaching the current employer of desired staff.
Tip 10: Clients/customers may be able to exert leverage on an individual’s current employer to allow that individual to deal with that client post-termination
The clients are, after all, free to choose where they place their business.
This blog first appeared on Economia.