All employers believe that they value their key people; they reward them well and in return expect loyal service until, that is, the employer is ready for a change in personnel. But in a highly competitive industry such as the oil & gas industry, too often the employer is caught out when a key person unexpectedly joins a competitor. It’s only when faced with the damage that the loss of a key person can do to the business that employers realise their true value. Key employees will have developed close relationships with other important members of the team as well as with customers and suppliers. The mere fact of the departure will doubtless cause unrest amongst those people and loosen the ties that bind them to the business. And, of course, a key person will have financial metrics and other confidential information at their disposal; information that employers dread falling into the hands of a competitor.
So what can employers do to protect their business from the loss of a key person? Here are our recommendations:
The effective use of garden leave provisions should not be underestimated. During a period of notice it is common to put an employee on “garden leave”. During garden leave, the employee continues to owe duties to his current employer, including the duty of fidelity, which is implied into every contract of employment. In a recent case the High Court upheld an employer’s claim against a senior employee who orchestrated a team move to a competitor. The Court found that the employee had breached the implied term by (amongst other things) failing to tell
his employer of a planned poaching raid involving other employees, discussing confidential information about staff salaries with a competitor and colluding with the competitor in identifying and recruiting members of staff. So, retaining an employee as part of the workforce, albeit on garden leave, can restrict their ability to compete.
The duration of garden leave is often called into question; employees argue that it is unduly restrictive for them to be “parked” for more than a few months. However, the High Court confirmed recently that in certain circumstances a 12 month garden leave can be enforceable, even when that effectively keeps an employee out of the labour market for the duration of the garden leave period. That is not the case for all employees; check your contracts of employment to ensure that they contain garden leave provisions and take advice on the length of these provisions to avoid disputes as to whether they are reasonable and enforceable.
- Tailor made
The most important rule when drafting restrictive covenants is to avoid a “one size fits all” approach. The most effective covenants reflect the individual circumstances of the employer and the employee. A restriction is only valid if the employer has a legitimate business interest that it is appropriate to protect and the restriction is reasonable having regard to the interests of the parties and the public. So, an employer does not have free reign to restrict an employee from engaging in work, even for a short period; its interests must be balanced against the
employee who will normally argue that s/he had less bargaining power when entering into the restrictions and has a genuine need to earn a living using his/her professional skills and experience.
The starting point is to identify the business interest the employer is seeking to protect. This may be driven by a desire to protect relationships with customers, intellectual property or a stable workforce. The employer should also consider which activities are most likely to threaten those interests and seek to focus the restrictions on those. Generally, restrictions based on geographic limitations are unhelpful as they don’t reflect the way in which modern businesses operate (but they may be important for some). Particularly careful thought should be given to the length of time a restriction will last for. In a fast- moving business a longer restriction is likely to be unnecessary and, therefore, unenforceable. The same is true if the information that an employee holds has a limited
shelf-life, for example if financial metrics, pricing etc. change rapidly. That said, there are recent examples of the courts upholding restrictions lasting 12 months when the particular circumstances of the business and individual support a finding that this period was necessary to protect the employer’s business and reasonable in the circumstances.
In short, it’s worth investing time and effort getting the drafting right at the outset. It’s equally important to review regularly the restrictions to ensure that they continue to reflect the employee’s position in the business, particularly if there is a change in role or promotion.
- Bad leaver? Bad luck!
A financial penalty associated with leaving can dilute the impact of a better offer from a new employer. An effective option is to consider making rights to unvested shares conditional on an employee complying with any restrictive covenants in their contracts of employment or any settlement agreement. A recent court case considered this option and it was found that a clause in a settlement agreement which stated that the employee forfeited rights to unvested shares if he breached his restrictive covenants was lawful. The position on vested rights is more complex.
- Prevention better than cure
It’s a mistake to assume that every employee is driven by financial reward alone. Of course, an honest worker needs to feel that they are being rewarded for their labour and it would be naive to assume that the financial package wasn’t a significant incentive to stay ( or leave) a business. However, regular and consistent communication is vital in keeping key employees engaged with the business. It’s when employees feel disengaged that they start to take calls from head- hunters. So make sure that you’re keeping in touch and really listening to what those who matter to the business are telling you.