Clause and Effect

December 9, 2010

This article was written for and first appeared in Money Marketing

Some employers are now adding contract terms concerning the duty of employees to report misconduct. Rebecca Davidson, senior associate at Fox Williams LLP, considers the legal implications

Is an employee required to report his own misconduct or the misconduct of others to his employer? In the financial services industry, where employees move employer frequently and often take clients with them (and sometimes fellow employees) when they leave, this can be an important question for both employer and employee.

It is fairly well established that where an employee is a director or a senior manager and is therefore a fiduciary, he will owe more onerous obligations to his employer, which can include reporting the fact that he is aware that other employees are soliciting clients or breaching confidentiality obligations in order to move to a competitor. In some cases, it can even include a duty to disclose the employee’s own misconduct.

Other less senior employees need to know where the line lies in terms of what they can and cannot do and employers need to know the extent to which they can protect their business where a less senior employee fails to tell them about his own misconduct or that of others.

This is one of the issues the High Court looked at recently in the case of Lonmar Global Risks v West and Others.

Three employees of Global Risks were summarily dismissed during their gardening leave after they took steps to move work and employees away from the company to their new employer. Global Risks brought claims for £2.5m against each of the employees for breach of contract.

Global Risks said the employees were in breach of a duty to disclose their wrongdoing and the misconduct of other employees. They said the employees should have told them they had received approaches from a competitor and that they were engaging in conduct that could damage Global Risks' best interests. They also argued that two of the employees had breached their fiduciary obligations.

The employees had restrictive covenants but had given undertakings in relation to those post-termination restrictions and there was no claim that they had breached those undertakings.

The claims by Global Risks failed even though the court found that two of the employees had committed such serious breaches of their employment contracts that Global Risks had been entitled summarily to dismiss them.

The main reason the claims failed is that Global Risks failed to show the firm had suffered losses as a result of the breaches of contract. The court also said the employees were too junior to owe any fiduciary duties as they had no management responsibilities. Because they were not fiduciaries, there was no implied duty on the employees to notify of their own misconduct or that of others.

This case is very fact-specific but it does provide some useful points for employers who want to protect their businesses and for employees who are considering leaving.

The employees in this case did not have any express term of their contract that specifically required them to report knowledge of any misconduct to their employer. Global Risks was therefore reliant on trying to prove there was an implied fiduciary term the employees had breached.

But the case may have been decided differently if there had been an express term in the employees' contracts that required them to notify the employer in the event that they become aware of any misconduct. For example, a specific clause could require an employee to notify the employer if they become aware that another senior employee plans to join a competitor, take any clients with him or breach any duty of confidentiality.

A number of companies have introduced these types of express clauses in contracts, although the point has not yet been fully tested in the courts.

As well as potentially giving the employer extra protection, such clauses are likely to act as a disincentive to any employee planning to approach other employees to join him in moving to a competitor.

Employers should consider updating the contracts of employment for senior employees who have strong client and team relationships but who are not fiduciaries.

For employees considering moving employer, the case highlights the importance that they understand both their express and implied duties before thinking about taking any clients or employees with them when they leave.

If the employees in this case had been in more senior roles, they may have faced substantial claims for damages if Global Risks had been able to show it suffered losses as a result of breaches of fiduciary duties.

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