3 Oct 2016

Dear Aunty

I am a CEO of a wealth management business (“the Company”).  Recently the Company bought out a traditional stock broking firm and took over its employees.  After we bought the firm, one senior member of staff, John Smith (who was formerly the manager of the stock broking firm), resigned and on the expiry of his restrictive covenants set up in competition with the Company.  Last week 20 members of staff (who used to work for John) resigned on the same day.  

The contracts of employment contain a six month notice period with garden leave provisions, and restrictive covenants barring them from trading in competition with the Company and from soliciting staff and clients for a period of six months post termination.  

John’s restrictive covenants have expired and he is entitled to set up in competition with the Company so it will be difficult to take legal action directly against him.  However, is there any action we can take against the departing employees as the departure of these employees en masse is likely to substantially damage the Company?

Yours sincerely
Mr P Instripe

Dear Mr P Instripe

Unless you can establish that John has induced the departing employees to breach their contracts or that he has conspired with the departing employees to injure the Company, you will have no legal recourse against him unless you can show he was acting in breach of his restrictions during the restricted period.  In respect of the departing employees, you must act quickly to investigate and determine what has been going on; to establish what potential legal claims you might have; and to take appropriate steps to protect your legal position.

Potential Breaches

The first step on becoming aware of a team move will be to consider whether the members of the team, or the new employer, have committed any unlawful acts.  The express and implied contractual obligations which may have been breached in this case are as follows:

  • Restrictive Covenants
    If the restrictive covenants are deemed to be enforceable then the employees will be in breach of their non-compete covenants if they start working for John’s company during the restricted period.  If they solicit clients from the Company during the restricted period they may also be in breach.
  • Confidentiality
    If the employees have inadvertently provided your confidential information to their new employer as part of the team move exercise, this may lead to a breach of the extensive implied confidentiality obligations applicable during employment.  They may also be subject to express confidentiality obligations and more limited implied confidentiality obligations post termination.
  • Duty of good faith and fidelity
    If there is evidence to suggest that the team move has been coordinated from within, this will usually involve a breach of the implied contractual duty of good faith and fidelity. 
  • Fiduciary duties
    Fiduciary duties are more extensive than a duty of good faith and fidelity and are likely to be owed by more senior employees.  Under this duty some of the more senior employees may be obliged to disclose their own misconduct and to reveal the plans and intentions of their team members.

Next steps
If you suspect that the employees either have or may breach their obligations, here are our tips for dealing with the situation:

  • Don’t give them grounds for constructive dismissal. Beware, the employees will be seeking to argue that the Company has committed a repudiatory breach of their contract, in an attempt to resign and claim constructive dismissal. This is because their restrictive covenants will fall away if the employer acts in fundamental breach of contract, so it is in their interests to look out for such a claim.  Be very careful not to do anything which might assist this argument, for example putting them on garden leave if you do not have the express right to do so, bad-mouthing them, or any other unreasonable behaviour towards them.
  • Take advice early so you can plan your approach, know the questions to ask and take steps to monitor their activities and protect your business. 
  • Conduct exit interviews with the employees to discuss their future plans. This may assist you in ascertaining whether or not there has been any breach of duty (see below).
  • Listen to the concerns of the employees who wish to leave to find out if there is any way of convincing them to remain with the Company.  Anyone who you incentivise to stay may be a useful witness in any future court proceedings.
  • Do not agree to an early release of the employees from their notice or restrictions before assessing the risks and consider placing the employees on garden leave if their contracts allow.  The longer you can keep them from competing the more time you have to put measures in place to replace employees and to build relationships with clients that may potentially move.
  • Remind the employees of the restrictive covenants in their employment contracts, and ask for undertakings that they will not commit a breach.
  • Where applicable warn the new employer that they have committed potential unlawful action and seek undertakings.
  • Where necessary undertake appropriate IT searches of emails, reviews of recorded telephone calls and records of movements through security doors. 
  • Consider a media handling strategy.
  • Act quickly – a court may deem you to have accepted any breaches if you do not set out your position clearly and promptly.
  • If you are unable to resolve the issues informally, you may need to consider commencing legal action and applying for interim relief.  

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