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This newsletter looks at the practical steps that all businesses should consider taking to protect themselves if key staff choose to leave.
All organisations have senior staff who are critical to the success of the business. Further, these individuals tend to have knowledge of the business and connections with customers, suppliers or other employees that can be used to catastrophic effect if they decide to leave and work in competition.
This newsletter looks at the practical steps that all businesses should consider taking to protect themselves if key staff do choose to leave.
There are a number of effective ways of minimising the impact of the departure of key employees. However, they all rely on well drafted, tailored contracts of employment. Careful handling of a departure when a resignation letter lands on your desk can also make all the difference.
In this newsletter:
- Garden Leave – The Best Type of Protection
- Holding Employees to Their Notice Periods
- Post-Termination Restrictions
- Protection Checklist
Garden Leave – The Best Type of Protection
Often, the most effective way of protecting a business when a senior employee decides to leave, is to impose a period of garden leave.
This means the individual continues to be employed during their notice period (and to receive pay and benefits in the usual way) but must stay away from work.
They are also not entitled to work for any other business or to contact colleagues, customers or other work related connections.
This complete bar from being able to work gives the business the opportunity to shore-up client relationships and prevents the departing individual from working in a competitive business or using confidential information. It does usually involve the cost of continuing to pay the individual. However, it is the most complete level of protection available.
In general, garden leave can only be used if there is an express contractual clause in the contract of employment allowing the employer to use garden leave. These clauses are also useful in imposing restrictions on an individual’s activities, such as:
- Not to contact colleagues
- Not to contact customers, clients or suppliers
- Not to make any announcement on social media or otherwise about their departure
- To return all company property including laptops, confidential information etc.
In the case of Christie v Johnston Carmichael, it was decided that an employer could put an employee on garden leave, even though there was no express contractual right for it to do so. This is very unusual as employees generally have a right to work. However, in the Christie case, the garden leave period was only for three months and Mr Christie’s skills in his role as a “generalist tax advisor” were held not to be damaged over that period.
Despite the Christie case, the risk of trying to enforce garden leave without a garden leave clause is that the employer is held to be in fundamental breach of contract by preventing the employee from working.
This means that the employee is no longer bound by any terms of the contract, including the obligation to work for their notice period or comply with any post-termination restrictive covenants. This leaves the individual free to join a competitor immediately. As a result, a well drafted garden leave clause is essential in any senior employee’s contract of employment.
Holding Employees to Their Notice Periods
Sometimes, employees seek to leave their employment immediately, without giving any notice, even though this is in breach of contract.
Whilst this would mean that there is no longer an obligation to pay the departing employee for their notice period, it can be the case that continuing their employment (and stopping them from joining a competitor during their notice period) is more valuable than the cost of their salary and benefits for their notice period.
It is often overlooked that an employer has the choice not to accept an employee’s resignation and to hold the employee to their obligation to give notice. An example is the football manager case of Crystal Palace FC v Bruce in 2002. In that case, there was a legitimate interest in preventing Steve Bruce from helping another football club. Therefore, the court confirmed that he was not entitled to leave without serving his notice and enforced his continued employment with Crystal Palace for his notice period.
The recent case of Sunrise Brokers v Rodgers has also provided very helpful guidance on dealing with an employee who tries to leave without serving notice.
The Rodgers case – continued employment and no pay
Mr Rodgers worked for Sunrise as a broker. His contract of employment included a garden leave clause, a three year fixed term and extensive post-termination restrictions that prevented Mr Rodgers from competing with Sunrise or soliciting customers. Mr Rodgers decided to join a competitor of Sunrise in March 2014. He told Sunrise he was leaving and “wanted to leave now”.
Sunrise refused to accept Mr Rodgers’ decision and maintained that he should return to work. Mr Rodgers refused and so Sunrise, in response, stopped paying Mr Rodgers whilst maintaining that he continued to be an employee for the remainder of his three year fixed term.
The High Court confirmed that Sunrise’s approach was correct. Sunrise was entitled to insist on continued employment and did not have to pay Mr Rodgers because of his refusal to attend work. This meant that Mr Rodgers could not take up his new role and Sunrise was protected for a period of time from Mr Rodgers’ planned competitive activities.
This is a very helpful case for employers, particularly as the court, for the first time, has confirmed that a contract of employment can continue, even if an employee is not paid. The employer in this case handled Mr Rodgers’ resignation very carefully and made clear throughout all correspondence with Mr Rodgers that his employment was being maintained.
Therefore, if an employee tries to resign in breach of contract, there is a real opportunity for employers to protect their business. However, it is critical that the communication with the employee is handled carefully to ensure that the employee’s breach is not accepted inadvertently. For example, unguarded words or the sending of a P45 to Mr Rodgers would have led to a different result.
In addition to garden leave and notice period protection detailed above, many employers also rely on post-termination restrictive covenants.
Typically, these covenants seek to prevent a departing employee from joining a competitor or from soliciting (or dealing with) clients, customers or colleagues for a period after leaving.
In recent years, probably as a result of the economic downturn, there has been a significant increase in claims brought by employers seeking to enforce post-termination protection.
The message from all of these cases is that post-termination restrictions will be enforced, but only where covenants are drafted carefully and go no further than is reasonably necessary to protect legitimate business interests.
What are legitimate business interests?
Restrictive covenants cannot be used simply to stop departing employees from working (or even competing). It is only where legitimate business interests have been identified that protection will be enforced. Typically, legitimate business interests are:
- Preventing the disclosure of trade secrets or confidential information
- Maintaining customer and supplier connections
- Avoiding damage to the stability of the workforce
Once the legitimate business interests in your business have been identified, it is then necessary to consider how best to protect those interests. This includes considering:
- Whether it is necessary to try to prevent an individual from working for a competitor (the most onerous, ‘non-compete’ form of protection)
- Whether preventing the employee from trying to poach customers or employees would be sufficient (the least onerous ‘non-solicitation’ form of protection)
- Whether an interim level of protection can be justified whereby the individual is prevented from dealing with customers, suppliers or employees
- How long a period of protection is required
- What geographical area of restraint can be justified
When deciding if covenants are enforceable, a business has to justify that they go no further than is needed to protect its particular interests. Relevant factors are:
- The work carried out by the individual
- The type of business the individual is leaving
- The level of contact the individual had with confidential information, customers, suppliers and employees
- How often that contact took place
- The level of seniority the individual was operating at
Often, we see covenants that are drafted more widely than is necessary. For example, they may seek to prevent an individual from carrying out any work at all with a competing business, whether or not that would damage the business they have left.
As a result, it is very difficult, if not impossible, to enforce those covenants. Further, even if a company would not necessarily consider litigation to enforce a covenant, the deterrent effect that applies to a set of well drafted covenants is also lost.
An example, is the recent case of Prophet Plc v Huggett. The restrictive covenant in this case purported to prevent the individual from working for another business on “company products”. Of course, only the company produces “company products” and the clause should have stated that the individual was prevented from working on “products similar to company products”.
The Court of Appeal provided an important reminder about how critical it is to draft covenants accurately. It confirmed that additional words cannot be read into a covenant. Therefore, as the literal reading of the covenant offered
the employer no protection at all, it did not protect the employer and the employee was free to compete.
How can an employer enforce restrictive covenants?
The main remedy for a breach of restrictive covenants is to apply to court for an injunction. This stops the individual immediately from acting in breach. In order to secure an injunction, it is necessary to demonstrate that there has been a breach and that the payment simply of financial compensation would not be sufficient to remedy that breach. This is usually the case as it is speculative loss of future profit at stake.
Often, evidence of breach can now be obtained by checking departing employees’ computer records and emails for unusual activity. The threat of an application for an injunction can then lead to a discussion about entering into undertakings that covenants will not be breached, at least to a certain extent.
This is particularly the case if the covenants are well drafted and the ex-employee therefore believes they are enforceable.
The view of the potential new employer will also be relevant as a claim is usually also brought against the new employer for inducing breach of contract (as well as a claim against the departing employee).
In many cases, an injunction application resolves the situation.
However, it is also open to an employer to apply to court for financial compensation, as long as actual financial damage, caused by the departing employee, can be shown.
When senior executives are recruited, the focus is on their value and contribution to the business.
However, employers should always consider including protection for the business in the event that the relationship comes to an end, and most senior executives accept that there should be a level of restriction on their activities when they leave.
It is certainly the case that such protection can be negotiated much more easily at the start of the relationship than when the relationship has broken down.
It is therefore worth investing some time in considering the protection that your business needs, and ensuring you have a carefully drafted set of clauses to achieve this. Ideally, you will never need to use them, but they are there just in case.
It is also important to bear in mind that, as individuals are promoted or moved to new roles within an organisation, their covenants should be checked to ensure they still properly protect the business.
Likewise, as the business develops and, perhaps enters new markets, the covenants again need to be reviewed to ensure they still reflect properly the business and remain effective.
If you are concerned that your contractual arrangements with your senior staff do not necessarily cover all of the points detailed in this newsletter, please do contact a member of the Myerson Employment Team.
We are experienced at assessing the appropriate protection needed by a business, giving you the best chance of protecting your business with robust covenants that ensure your senior executives comply with their terms or, if they do not, can be used effectively in legal enforcement proceedings.
This checklist covers the main areas of protection that you should ideally include in the contracts of employment of your key employees: