Employment disputes and breach of contract cases are on the rise, says Steve Goodrham, head of commercial dispute resolution at lawyers Gateley
Poor redundancy strategies, combined with an increased demand for key personnel to provide businesses with a competitive edge, have led to an outright war for talent in the IFA sector recently. Our research at Gateley shows a significant rise in cases being brought against people who breach the terms of their employment contracts when joining rival companies. But interestingly, there has also been a marked increase in cases where not only have specific individuals been targeted, but entire teams.
As you’d expect, business heads understand the need to invest in top talent, even against a backdrop of economic uncertainty. Inevitably, this has led to more senior-level hires and, equally inevitably, a spike in poaching from the competitor talent pool.
And nowhere more so than in highly competitive fields, like the IFA market, where talent and personal relationships are at a particular premium. As such, IFA businesses need to take a firmer stance in protecting their interests and enforcing restrictive covenant clauses. If not, they could leave themselves open to losing important clients as they move across with ex-employees.
Rocking The Boat – The Legal Precautions
The instability resulting from the increase in organisational restructuring has left many employees feeling vulnerable and demotivated. If you factor in pay freezes and salary cuts that are still being implemented in some companies, then you can see why businesses are finding themselves more exposed than ever to competitor approaches towards their staff.
There are a number of steps businesses can take to ensure that their commercial interests are better protected in future – such as ensuring well-drafted restrictive convenants are included in employment contracts from the outset, and tightly drafted gardening leave clauses are built in to limit competitive damage. However, a business that feels an employee is already in breach of post-termination obligations, such as restrictive covenants, should seek legal advice quickly.
In the well-publicised Towry case heard earlier this year, a wealth manager was ordered to pay full costs after a judge found that its advisers had not broken non-solicitation clauses when leaving the firm. The response in the marketplace was that restrictive covenants in advisers’ employment contracts will continue to be enforced despite the High Court loss. The key point to come out of the case was that they will need to be carefully drafted to avoid having no legal benefit.
What About Clients?
The law dictates that all clauses must be deemed reasonable. And tt must also be remembered that restrictive covenants should be designed to protect employees, employers and clients too. So all parties need to read and understand their contracts, make sure that they adhere to them, and ensure that clients will not be disadvantaged as a result of any contract terms.
Commercially, it does not make sense to hold a client against their will and, in exceptional circumstances, it can make better sense for the IFA firm to concentrate efforts on keeping the existing client happy, rather than chasing after the adviser who has left the business.
It’s also worth considering that employees may not realise that what they’re doing is wrong! Because a relationship between an IFA and a client is so personal, the adviser can easily overlook the fact that he’s doing something he’s not legally entitled to do by taking ‘his’ clients with him to another firm. For his employer, sometimes just flagging up the terms in the employment contract can put a pretty sharp stop to the issue.
Individual advisers also need to put themselves in the position of their employers, if they are subject to an approach from a competitor. It’s likely that the employer has invested heavily in training, infrastructure and creating a support team that has all led to the development of a book of business. And, to avoid confusion, it’s crucial that clients understand that the advice they receive is the firm’s and not specifically the individual they deal with.
It’s vital to strike while the iron’s hot, if your employee is in breach of restrictive covenants within his contract, and employers should not be put off from pursuing a claim. The most effective legal option available to an employer is to obtain an interim injunction which prevents the ex-employee from working for a competitor, and from soliciting customers or staff for the duration of any non-compete covenant. But this must be done without delay.
Businesses and individuals alike need to seek high quality legal advice as soon as possible and not act in a way that could cause further complications down the line.
Tags: breach of contract | breach of contract cases | clauses | commercial dispute resolution | commercial interests | competitive edge | convenants | economic uncertainty | employment contracts | employment disputes | freezes | gardening leave | outset | personal relationships | redundancy | restrictive covenant | rival companies | rocking the boat | salary cuts | talent pool