Dispelling common myths: Protecting your business when people move

20 February 2008

Warren Wayne

It is a truism that managers are often so busy that they can overlook, or get complacent over, the tell-tale signs that their staff are planning a move. This often means that by the time it is realised that there is an issue, it can be too late to nip it in the bud. Unfortunately, this is also the stage where many businesses hamper themselves further, by making assumptions about their options and thereby losing valuable time and possibly business too.

Common Myths

Some of the most common mistakes that employers make are to make some of the following assumptions:

  • That garden leave alone is good enough

  • That it is not worth doing anything until you have actually lost business

  • That, legally, you cannot do anything until business has been lost

  • That clients will have to be involved

  • That it is too difficult to trace what employees have been up to

  • There is no point: either the restrictive covenants won’t work, or the employee never signed a contract

Similarly, employees tend to also believe these myths and often base their exit plans on them. There are also a few other ways in which employees like to mislead themselves:

  • “They can’t find out what I’m up to”

  • “I’m allowed to do it”

  • “Someone else can do it for me”

  • “I can encourage others to join me before I leave”

As we will see below, these assumptions are incorrect. It is not only employers that lose out by believing them. Employees frequently leave themselves vulnerable to being discovered and stopped, by putting their faith in them.

Employer’s Myths

Garden Leave

Garden leave can be a useful method of immediately containing a situation, but it is only one element of an effective strategy. Garden leave may keep staff away from office-based information, but it does not stop them making private calls from home or on mobiles. Neither does it stop them using information they have taken home undetected. Experience shows that anyone who is planning to leave and compete will generally have already removed most of the information that they want, well in advance of resignation. The main benefit of garden leave is that it prevents immediate contact with clients who call the office. The clients the employee is most interested in, however, will still be targeted by him regardless of whether or not he is in the office.

Loss of Business

It is surprising how often businesses say that they cannot do anything until they have shown that they have lost business. The fact that it is often difficult to show loss of orders in a competing market only fuels the belief that it is not worth taking any action. This could not be further from the truth.

If an employee leaves and intends to compete, the High Court has power to grant an injunction to prevent competition – as long as it can be shown either that the employee has an intention to compete or actually has competed, where such competition is unlawful. Showing an intention to compete is easier than it sounds, particularly as departing staff may refuse to sign an undertaking not to break the restrictions. Sadly, many staff are prepared to massage the truth when telling you about their future plans, but will not commit themselves in a binding document to back up what they tell you.

There is another good reason for taking action before any business has been lost. The Courts have to assess whether to grant an injunction by considering the “balance of convenience”. This means that they have to consider whether damages would be a better remedy than an injunction. If an employee has already left the business and taken a client then too much delay will increase the risk that it will be too late to go for an injunction, although damages are still available and there is always the possibility of trying to win the client back.

Involving Clients

Although it is often clients that first provide a tip-off that prohibited competition is going on, it is exceptionally rare for any further client involvement to be necessary. There are a variety of ways of dealing with both legal evidence and customer relationships which should allow you to avoid any damage to the client relationship.

Tracing Evidence

There are now many ways to detect unauthorised calls to clients and candidates, as well as uncovering (and reconstructing) email communications. Many employers have found critical evidence through these methods, revealing activity that they would never otherwise have believed was taking place. Needless to say, once you have this evidence, there is little that the departing employees can do to defend their position.

Restrictive Covenants

Although it is important to have carefully drafted and properly worded restrictive covenants, that is not the whole answer. The High Court has inherent jurisdiction to grant injunctions for breaches of common law obligations. While these obligations are not as extensive as the restrictions that can be placed in a contract, they are frequently very useful.

“Springboard” injunctions are a good example: it is enough to show that an employee has removed information which is confidential and would give a competitive advantage. If the Court is satisfied on these issues, it will injunct ex-employees from using that information, so that they cannot deal with the clients concerned. In some cases, it can result in them being prohibited from working for whatever period the Court thinks appropriate.

There is also a common misconception that restrictive covenants never work. Admittedly, it is the job of legal advisors to argue over the wording, as each side battles to prove the restrictions are or are not enforceable. Such arguments, however, are often misleading. Don’t forget that these are often just positions adopted for argument.

Employee Myths

Employees’ assumptions don’t stop with the self serving belief that they won’t be detected, or that restrictive covenants can’t be enforced. It is commonly believed that ex-employees can get away with soliciting their ex-employer’s customers, as long as they get someone else at their new job to do it. This overlooks the fact that virtually all contracts now prevent indirect activities – in other words, getting someone to do it for you. In some cases, the new employer already trades with the relevant customer, so such continuing activity cannot be stopped. But this is a very different situation to the one that staff like to believe it is.

Employees also widely believe that they can make plans with other staff, or actively recruit them to leave at the same time. Staff are not expected to know the legal niceties around these issues, but for many people this issue fails the common sense test. It hardly needs emphasising that encouraging others to join you in leaving for a new company is a breach of duty for all staff. Directors also owe fiduciary duties, which only compounds the breach where they arte concerned. It has also been confirmed that this type of behaviour means that Directors (and possibly other senior staff) are under a duty to confess their own misconduct (Item Software v Fassihi [2004] IRLR 928).

Conclusion

Many restrictive covenants are enforceable. Although many have a variety of minor defects, the Court has power to disregard, or cross out, small defects.

In most cases, the nuances which are argued over in solicitors’ letters are not as important as getting an expert view quickly and then being decisive about the strategy you should follow.

This article was first published by Croner.