Protect Against Staff and Client Poaching
2 March 2010 Kate Brearley
Demand for talented employees is growing, but how can you best protect your business from staff and client poaching? Kate Brearley, partner at international law firm Stephenson Harwood and co-author of Employment Covenants and Confidential Information – Law Practice and Technique, and Sarah Gallon, associate at Stephenson Harwood provide some legal guidance.
As the economy staggers out of recession, employers' demand for the most talented employees to increase business profitability or run overseas group operations will continue to grow. To win the work of their competitors, many employers are also looking to recruit rival teams or key staff who will bring clients with them.
However, chief executives whose businesses are safeguarded with contractual provisions and whose line managers can identify the warning signs of defections will be better placed to protect the business when competitors attempt to poach individual employees or talent an entire team.
Properly drafted terms in a contract of employment can form a vital part of the employer's armoury in protecting its business.
Key terms that should be included to protect a business are:
(i) During employment
- a positive duty to promote the interests of (and not harm) the employer's group
- a restriction on undertaking outside business activities (at all or only with the consent of the employer)
- confidentiality terms protecting trade secrets and other confidential information. A non-exhaustive list of confidential information should be clearly identified and reinforced by the practices of the company.
(ii) On termination of employment
- sufficiently detailed garden leave provisions together with clear notice periods of an appropriate length to enable the employer to maintain a sufficient period of garden leave
- a right (but not an obligation) to make a payment in lieu of notice on termination. Without the right to terminate immediately, termination without notice will be in breach of contract and the employer will run the risk of losing the benefit of its restrictive covenants
- an obligation on the employee to return company property on termination and flexibility for the employer to require resignation from any directorships on its request
(iii) Post employment
- tightly drafted restrictive covenants tailored to protect the employer's legitimate business interests (primarily business connections, a stable workforce and confidential information) and which reflect the role and importance of the employee. Restrictive covenants that are wider than necessary will be struck down; it is not a case of 'bigger is better'.
Finally, consider recording the employee's status as a fiduciary, if applicable. The obligations and remedies for breach of such duties can be more extensive than non-fiduciaries.
Practical anti-poaching steps
There are a number of practical steps that can be taken throughout the employment relationship to protect the business from employee departures. These include:
- cultivating an allegiance with employees so that they reward the employer with loyalty. This is not to be underestimated and has the knock-on effect of establishing a good reputation that can give the edge over a rival when competing to recruit new talent
- recognising the employee's value and ensuring that career structures are in place
- demonstrating a balanced recognition of the employee's family life and the need for time off for holidays and leisure time
- ensuring the employee is being properly remunerated with an appropriate remuneration structure, including the split between cash and non-cash benefits
- considering the use of long-term incentive plans (LTIPs) for the employee. LTIPs can come in a variety of forms including an equity stake in a group company, cash bonuses or restricted shares delivered in tranches. These are particularly useful where it is important to retain the employee for a particular project
- considering involvement of the employee in management. The implied duty of fidelity imposes a higher obligation on employees in managerial roles. This acts as a deterrent against competing and imposes additional obligations including the requirement to make specific disclosures to the employer in certain circumstances.
Detecting a team move
Employers should know their business and which teams are susceptible to poaching. The larger the team the easier detection should be.
Look for signs including changes in behaviour such as unusual absences or travel plans, off-site group meetings and employees who suddenly nurture new working relationships with one another.
The employer's email system may be used to send seemingly legitimate emails, which on closer inspection reveal a potential team move. Itemised bills for mobiles and Blackberrys and new email groups can give away the employees involved.
It is not uncommon for employees with short notice periods and no restrictive covenants to resign first so that they can start competing, apparently legitimately, before senior managers resign. The resignation of junior employees is often a sign that a team move is being orchestrated.
Protect clients from former employees
The best way of retaining clients is to ensure that clients have strong relationships with a number of employees. Handover from departing employees should be executed carefully and consistent statements provided to clients. Consider bonuses for remaining employees who retain these clients.
Consider seeking an injunction to restrain any ex-employee from soliciting clients, in breach of non-soliciting or non-dealing covenants. Damages or an account of profits are alternative remedies but by this stage the client's business and possibly the prospect of any ongoing relationship has been lost.
Legal action to prevent staff poaching
It is crucial that the employer knows its business to minimise risk and does not commit any fundamental breach of contract that would render restrictive covenants unenforceable. However, preventative measures are generally more cost-efficient than bringing legal action.
Other remedies include an injunction restraining the ex-employee from working for a competitor for the duration of any non-compete covenant, damages or an account of profits. Where an injunction is sought, action must be taken without delay. The options and remedies available will depend on any breaches of contract (or duty) by the ex-employee and any wrongdoing on the part of the prospective employer.