We run the legal lens over the age old problems which often arise as a result of team moves. Employment law specialist Wedlake Bell LLP gives practical tips on how you can protect your business from such moves and steps you can take should you have to experience it.
Organisations are facing so many challenges at present, it is easy to get distracted from what is always an underlying threat – employees taking your business to a competitor. With revenue already at risk, the loss of key divisions and revenue streams could be catastrophic. When staff are concerned about the future viability of their jobs, or perhaps because they have been thinking about a change whilst on furlough or after salary cuts, they may be looking for a more stable alternative – a safe port to which to take their clients, contacts and colleagues. The flip side is that with a lot of movement in the market this is an ideal opportunity to inherit a team.
Team moves occur when two or more employees decide to resign and either set up in competition with their current employer or join one of their employer’s competitors. The loss of a team can inflict significant harm upon a business due to a loss of expertise or business lines and the subsequent competitive threat that can arise. The inheritance of a team can be of great benefit to a business that will then have a “springboard” from which to build its business. If the team act in breach of their contractual obligations with their existing employer then the team and the new employer could face legal action.
It has been reported that, earlier this year, the investment bank Stifel Nicolaus sued the financial services firm Jefferies International and six of its ex-employees for £5.7 million on the grounds that Jefferies had improperly poached the employees in a ploy to undercut Stifel and drain their customer base and expertise (https://www. law360.com/articles/1315148/jefferies-says-better-payled-rival-s-employees-to-leave). Last month, in a filing with the High Court, Jefferies International strongly denied Stifel’s allegations, arguing that the employees were recruited lawfully through a networking agency, with each employee being recruited individually.
In the light of these allegations we explore the grounds employers have to take legal action against former employees and competitors orchestrating team moves, and the precautionary measures employers can take to prevent their employees from being poached.
Grounds for making a legal claim
Employers should consider their legal options if they suspect or can show that their former employees and the new employer have acted unlawfully. In these situations employers often focus on the post termination restrictions (otherwise referred to as restrictive covenants) within the employment contract to see if these have been breached, but often the unlawful acts have started before the employees have left the company.
In the context of a team move, an employee may be in breach of both express and implied legal obligations in their employment contract.
If included in an employee’s contract, the express terms which are most likely to be breached by staff involved in a team move are:
- Non-compete provisions – these often prohibit employees from having an interest in a competitor’s business during their employment and providing services to a competitor for a specified period following the termination of their employment.
- Non-poaching provisions – these usually prohibit former employees from soliciting, recruiting or assisting with the solicitation or recruitment of co-workers. Sometimes non-poaching clauses may be drafted in order to extend to prohibiting team moves (so that employees cannot go to work with each other for a competitor), in addition to poaching individual employees.
- Non-solicitation and non-dealing provisions – these can prohibit ex-employees from both soliciting their former employer’s clients as well as having any dealings with them.
- Confidentiality clauses – these prevent the disclosure or misuse of the employer’s confidential information (in this context confidentiality clauses will be of particular relevance to customer information).
There are also a number of obligations which are implied into employment contracts between employer and employee. These legal duties will vary to some degree depending on the seniority of the employee’s role.
The implied terms most likely to be breached by an employee involved in a team move are the:
- Duty of good faith and fidelity – this duty encompasses the following employee obligations:
- not to compete with the employer during employment or assist a competitor (some steps can be taken to prepare to compete but these are limited);
- not to entice fellow employees to leave employment to join a competitor;
- not to disclose or misuse confidential information belonging to an employer during employment; and
- possibly, to report a competitive threat, and to disclose one’s own misconduct and fellow employees’ misconduct.
- Duty of trust and confidence – the implied duty of mutual trust and confidence between employee and employer may add weight to an employer’s claim that an employee is in breach of contract following a team move.
- Fiduciary duties – these will only apply to employees in fiduciary positions, such as company directors, and are more onerous than the other implied employee obligations.