The Great Resignation and restrictive covenants
By Nick Wilcox
Nick Wilcox and Theo Nicou reflect on restrictions in employment contracts
As the government relaxes pandemic restrictions, recruiters are hotly anticipating the “Great Resignation” of employees, who perhaps no longer like their employer’s way of working and believe they can achieve a better balance – whether that is more, or less, working from home.
In this article, we consider some of the key issues surrounding restrictive covenants in this context.
Whose is the client?
One of the prime causes of disputes in this area is the disconnect between factual belief and legal reality as to who ‘owns’ a particular client relationship.
Employees whose ‘career currency’ is the personal relationships they have cultivated with clients over time – in trading, broking and sales environments for example - often operate on the basis the clients belong to them. While this is understandable on a human level, unless there was pre-agreement with the employer, this is not legally correct. The law treats clients as belonging to the employer, recognising the time and money it has invested in developing and nurturing those relationships – and for which the employee has already been remunerated.
There is also sometimes a surprising belief amongst employees that restrictive covenants would not be enforceable by the employer, perhaps based on the employer not having taken steps to enforce when a previous colleague left.
As a result, many employees do not read their employment contracts or take legal advice before deciding to leave and informing ‘their’ clients. If steps are taken during employment, or during a restricted period after employment, to attract clients to their new employer this can open up a world of legal pain if it comes to their employer’s attention. The taking of early legal advice can ensure common mistakes are avoided and frequently reaps dividends in this situation. This is particularly the case if employees are considering leaving en masse in a ‘team move’.
For employers, it is important to ensure employees’ employment contract terms and post-termination restrictions are appropriate to the employee and are up to date. This is especially important if there have been changes in the business. For example, where companies have been sold, staff transferred, or there has been a restructure – or simply where employees have been internally promoted over time.
The impact of social media
Employees and employers alike should be conscious of the risks posed by social media.
From the employer’s perspective, on a practical level, the use of platforms such as LinkedIn by employees seriously risks undermining the utility of restrictive covenants. Their employees are already in ready contact with their client connections – and have an easy means of communicating with them.
This is not a licence for employees to poach clients, however – and there are some obvious pitfalls. Most users’ LinkedIn accounts are usually configured to automatically notify their connections if they move roles. A court could class that as an act of solicitation of client connections – even more so if the user goes further and posts details of how and where they can be contacted and invites clients to get in touch.
Public social media posts are able to be used as evidence of solicitation in court proceedings. Direct messages sent by the user to client connections – even if sent on a privately owned smartphone – would also be disclosable. Employees should not post anything on social media they would not be comfortable with their employer, or perhaps a Judge, seeing.
The stakes can be high
If an employer becomes aware employees and clients are intending to resurface at a competitor, it may decide it needs to take urgent steps at court to protect its business in the form of injunctive relief and a claim for damages.
Cases such as these are almost always litigated in the High Court, where the general rule is the loser pays not only their own costs but also a proportion of the costs of the winner.
For the former employer, it is a costly process to protect the proprietary interests of the business, in circumstances where an entire team is going to a competitor. Enforcing obligations against the team – and perhaps also the competitor – often involves prompt action, which demands a great deal of management time and resource. The urgent nature of such applications means they can come at great financial cost to all concerned, and for the departing employees that is often, but not always, a cost the new employer is willing to reimburse.
Sometimes court proceedings become too much for the new employer to bear and it may well be quite easy for the employment of those involved to be terminated, given the relationship has only just begun. This means employees risk alienating the clients themselves and being out of employment altogether, while defending expensive litigation.
For those employees who work in the financial services sector and are regulated by the Financial Conduct Authority under its Senior Managers Regime, the stakes may be considered to be particularly high.
Regulated firms are required to certify their employees as ‘fit and proper’ on an annual basis, and in regulatory references be taken up by the new employer when the employee moves on.
Team moves, which, by their nature, often involve an element of subterfuge, could impact the prior employer’s view of their ex-employees’ fitness and propriety. In a worst-case scenario where the new employment falls through, it is easy to see how regulatory concerns such as these could affect not only an individual’s job but also their career.
Nick Wilcox is a partner and Theo Nicou an associate at specialist employment law firm BDBF: bdbf.co.uk