Civil Fraud Quarterly Round-Up: Q1 2021
The starting point with restrictive covenants is that in order to be enforceable, they must be no wider than is reasonably necessary to protect an employer’s legitimate business interests. Our “top tips” below provide guidance as to the factors you ought to consider when entering into such covenants, and upon the termination of your employment.
Click on the relevant tip to expand for further information.
Whilst nobody wants to contemplate the circumstances in which they might leave their employer (especially not when first joining a new company), this may be the best opportunity you will have to negotiate your post-termination obligations. It is therefore important to understand what is meant by the defined terms in your contract as they apply to you upon termination. For example, which parties are defined as “Customers”, what are “Competitive Services” and for how long are you prevented from working for these parties or performing these services (three months, six months, a year…)?
It is also important to understand the extent to which any definitions in your restrictive covenants apply to your use of social media or your connections on sites such as LinkedIn, Facebook, and Twitter. Who you regard as a “personal” contact may, in fact, be a “business” contact and may therefore belong to your employer, even if they are contacts or clients who you have brought to the business. Depending upon your bargaining power, you may be able to negotiate more favourable covenants or carve outs in respect of certain contacts/clients. If you do leave, will your restrictive covenants prevent you from working at all in your chosen field? What will happen to long-standing contacts you are bringing with you to your new employer?
This makes a difference. Those who owe fiduciary duties are required to act with the utmost loyalty, good faith and in their employer’s best interests (rather than their own).
The more senior the member of staff, the greater the degree of fidelity and diligence s/he is required to exercise, and the more likely s/he is to be regarded as a fiduciary. If you are a director, you will owe these more onerous duties to your employer under statute. However, assessing at what point an individual who is not a director is regarded as owing fiduciary duties is sometimes difficult to determine and seeking legal advice in this regard will be critical.
If you do owe fiduciary duties, you will be under an obligation (regardless of the terms of your contract of employment) to report your own wrongdoing and that of others. For these purposes, wrongdoing includes any activities which could conflict or compete with those of your employer (such as discussing a team move with a competitor, learning of or being involved in a team move etc.).
Regardless of whether you do or do not owe fiduciary duties, many contracts of employment include a provision in them obliging the employee to notify their employer immediately upon receiving any approach or offer of employment from a third party (such as a competitor or client). If you do not notify your employer of any such approach or offer (or delay doing so), it may argue that you have acted in repudiatory breach of your contract.
The effectiveness of contractual clauses which seek to impose a positive obligation on you to disclose receipt of an approach or offer of employment immediately to your employer, is arguable. An employee is entitled to both look for a job and be offered one.
That said, if you are still working for your employer and your employer is able to prove that you have breached your disclosure obligations in some way, it may be entitled to treat your contract as terminated. In such cases, you may not be entitled to your contractual notice period or any payment in lieu of notice. You may also lose your entitlement to any bonus or commission payments, and depending upon the terms of the scheme in question, you may be regarded as a “Bad Leaver” for the purposes of any incentive plan.
If you have already left, your former employer could elect to issue proceedings against you for damages to cover any loss it can prove it has suffered as a result of your breach (albeit practically, evidencing such loss could be very difficult). Alternatively your former employer could seek to claw back any profit you have made as a result of your breach. It could also seek an injunction to prevent you from working for or dealing with your new employer, at least until your restrictive covenants have expired. In extreme cases your former employer could apply for a search order (formerly known as an Anton Pillar Order) entitling it to search your premises (whether residential or otherwise) for evidence.
There is a question mark over whether this response to a breach of disclosure obligations is reasonable, and it is difficult to see how a former employer could quantify any damages. However, in the interests of protecting your position, it is important to ensure that you are aware of your contractual obligations and how far they may extend in relation to disclosure. If you learn of any wrongdoing or are involved in the same, you ought to inform your employer as soon as possible.
In an effort to ensure employees’ loyalty, employers may include contractual provisions in their contracts which state that a certain percentage of an individual’s bonus payment is to reward good performance, whilst the remaining (often majority) percentage is to reward loyalty.
Employers may include terms in their contracts of employment stating that the payment of any bonus will be discretionary, and that a large part of any such bonus will be deferred so as to incentivise employees to remain in their employment. In the event of you handing in your notice, you may be required to repay the portion of your bonus which expressly relates to loyalty. Alternatively, you may forfeit your bonus in its entirety if, for example, you are not employed upon the relevant payment date or are under notice at that time. This is also worth bearing in mind in relation to any commission payments, share awards or long term incentive plans to which you may be entitled under your contract. Consider the rules of any such schemes and the terms of your contract very carefully in order to assess any interplay with your restrictive covenants or other post-termination obligations.
It may also be important to assess the timing as to when to give notice of the termination of your employment, particularly in relation to any bonus, LTIP or commission awards. Resignation between year-end and any bonus payment date would be unwise, unless your prospective new employer is prepared to match the losses you will incur.
You may also wish to consider seeking an indemnity from your prospective employer in respect of the legal costs and financial losses you may suffer as a result of you leaving your current employer. Your prospective employer may wish to caveat this indemnity, by making it subject to the condition that you are required to seek its approval before you take any steps in relation to the termination of your employment with your current employer. However, note that any such indemnity in respect of legal costs arguably looks like an admission of breach of your restrictive covenants and/or your contract of employment more broadly.
If you have a blackberry, mobile phone, laptop or other work-related electronic device, your employer will be able to require its return (as such items constitute “Company Property”) and may be able to review all the calls, emails etc. you have sent or received on, or from, it on the company server.
If your employer instigates legal proceedings against you, the duty of disclosure in such cases is far-reaching. You will be required to disclose all those documents which you have in your possession or control relating to the issues to be determined in the litigation, regardless of whether those documents support your case or undermine it. This includes any emails or texts which you have sent on any electronic device (whether or not work-related) if they are relevant to the proceedings. It also includes any notes, memoranda, documents, scribbles, diary reminders, post-its, invitation requests, meeting planners, USBs etc.
If you do receive an approach or offer of alternative employment from a third party, so far as is possible you should not do anything which your new employer does not want you to do. Be aware that they may be more (or less) risk averse than you. The restrictive covenants in your existing contract are your employer’s way of seeking to protect what it regards as valuable business interests. If any such interests are at stake, it may fight hard to ensure that these interests are safeguarded.
It is best not to discuss a potential move with colleagues or engage in “water cooler chat”. In the case of a team move, avoid attending “group” meetings or events during the recruitment stage at which potentially poached colleagues and/or your prospective employer may be present, or until such time as your restrictive covenants have expired. Even if such events are genuinely social, suspicions may be aroused as to the extent to which your move (and that of any colleagues) was co-ordinated.
If your employer has breached your contract of employment in some way (perhaps by paying you in lieu of your notice period or putting you on garden leave when there was no right in your contract entitling it to do so), this may amount to a repudiatory breach of your contract by your employer. In such cases, your employer will probably not be able to rely upon the restrictive covenants set out in your contract. Whilst the law is undecided on this point, the covenants may, in effect, fall away and you may be free to deal with and work for whichever parties or perform whatever services you wish upon termination of your employment. Nonetheless, it is important to seek legal advice in such cases to assess whether your employer really has breached your contract, whether you have accidentally (or otherwise) accepted that breach and/or whether your covenants continue to bite.
You may be required to enter into tighter restrictive covenants as you move up the professional hierarchy and your level of responsibility or exposure to confidential information increases. In such cases, make sure that the consideration you receive for entering into the covenants in question adequately compensates you for the fetter the covenants place on your ability to find alternative employment upon termination.
You may have limited negotiating power in such cases (and may not wish to “rock the boat” if you are being promoted or awarded a substantial bonus), but that does not mean that you should unconditionally accept whatever covenants are presented to you. If this is done when you are already planning to leave or have given notice to terminate, you should not agree to enter into tighter restrictive covenants unless:
Depending upon the circumstances, your legal adviser may recommend meeting with your employer to discuss the scope of your post-termination obligations. It may be possible to negotiate a shorter period of time during which some or all of your restrictive covenants apply or are waived.
Your employer’s willingness to negotiate will depend upon the business interests its restrictive covenants seek to protect and the commercial safeguards required at the time. Some employers may be willing to reassess the duration or scope of an employee’s restrictive covenants upon termination (if, for example, the individual is moving from a regulated to a non-regulated function, will be acting in a wholly different capacity, or is the only individual within the employer’s business doing that function meaning that no competition will exist post-termination). The employer will also be conscious of the reaction of clients to the restrictions, and of other employees to any relaxation of those restrictions.
For more information about our services for employees and employers in respect of restrictive covenants and team moves, click HERE.
Should you have any further questions, please contact a member of our employment team.
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