You place a lot of trust in your key people. They are the ones responsible for building up relationships with customers, suppliers and other important members of your team. They have access to your plans and prospective business opportunities. They know where your salmon spawn and your pheasants frolic – as it were.
So what if one of them joins a competitor or sets up in competition with you?
Could they walk away with your customers or key team members? Could they use their knowledge of your plans against you? In many cases, the answer to these questions is undoubtedly ‘Yes'.
The law restricts the extent to which you can prevent competition, but there are game-keeping steps that you can take to protect your business against these risks.
Here is a brief guide:
1. Inspect your walls and fences
- Think about and identify key business interests that require protection (e.g. key customer and supplier connections, and key staff relationships)
- Identify the positions within your organisation which influence those key business interests
- Consider how much protection you really need at different levels – and for different roles. Be realistic:
- Roughly, how long would it take you to cement those relationships if a key person left?
- What geographical area does the relevant part of the business operate in?
- For how long could your confidential business information really be commercially damaging?
- Which kinds of staff could cause you real business problems if they were enticed away?
- What kind of information could cause you business problems if it became known to a competitor?
2. Spot the gaps to be plugged
- Consider the protection your specific business needs against ex-employees, but no more. This is important – if post-termination restrictions go too far, they will not be enforced by the Courts, and will leave you in a weak negotiating position.
- Look at the length of the notice periods. Are they long enough to give you time to get your house in order before key people leave and are free to go? Or are they too long – leaving you paying out salary for too long when you want an individual to leave? There is a fine balance to be struck here.
- Consider whether harsh restrictions in the contracts might hinder when recruiting any key new people.
- Think about introducing so-called ‘garden leave' clauses – if you don’t already have them – enabling you to require key employees not to work during their notice periods. These are usually easier to enforce than post-termination restrictions.
- Include clear payment-in-lieu-of-notice clauses, which contractually enable you to terminate employment immediately, while preserving the enforceability of your post-termination restrictions.
- Cover any specific intellectual property issues that you may have, such as protecting patents, copyright, design rights, database rights and trademarks.
- Cover any confidential information protection issues that you may have: specifically identify and prohibit the use or disclosure of the kinds of information that would be most damaging in the hands of a competitor.
- Include reference to clear policies on the use of data, IT systems and contact lists belonging to your business, including (for example) social media and other contact lists introduced to, or generated in connection with, your business.
- Include clear duties on key people to act at all times in the best interests of the business, including in relation to specific areas such as maintaining and building customer, supplier and staff relationships for the business.
- Avoid a ‘one size fits all' approach. Being able to demonstrate that genuine consideration was given to the varying risks presented to the business by employees of different seniority and role is likely to make the restrictions more enforceable.
- Include obligations on key people:
- To report any plans by employees to compete that they become aware of (including their own); and
- To show the post-termination restrictions to any prospective new employer
3. Plug the gaps
- It is best to take specialist advice on drafting and introducing new contracts for key people. Be aware that there are some important tricks of the trade, which are too detailed to cover in this article. The steps suggested in this brief guide should, however, enable you to give clear instructions, cut down the amount of work your advisers have to do, and achieve a more effective end result.
- Consult with your people about the proposed new terms and the reasons for them. Include some ‘up-side' for them in terms of pay and/or benefits, which will make the changes more attractive as a package, and the new contract enforceable.
- Having consulted and made any necessary adjustments as a result, make sure they sign and return their new contracts.
- If some people do not sign, discuss it further with them. Help them understand why the business needs the reasonable level of protection you require. Make sure they do not receive any of the ‘up-side' until they have signed and returned their new contract.
- In most cases, all key people can be persuaded to see sense and sign reasonable new terms. In some instances, it may be necessary to phase changes in as people are replaced or promoted. Terminating all existing contracts unilaterally, and offering to replace them with the new terms is an option, but it can be seen as draconian and carries risks.
4. Patrol regularly
- Regularly review and update your key contracts of employment, especially for new recruits and promotions.
- Make sure the updated contracts reflect any changes to the business and the position of the employee.
- On promotions or changes of role, ensure a fresh contract is entered into in full rather than relying on amendments to an old contract. Otherwise, post-termination restrictions are less likely to be enforceable because the Courts look at them in the context of the business at the time when they were entered into.
5. Monitor and (if necessary) act
- Keep your binoculars at the ready for signs that key people might be considering leaving, such as changes in patterns of activity, unusual absences, and increased focus on particular relationships.
- Sensitively raise any concerns that you might have at an early stage. Your fears may be misplaced, or you may be able to retrieve the situation and retain the person.
- If you are given notice of resignation by a key person, consider whether they should be asked to work their notice period, put on garden leave, or paid in lieu of notice. This will depend partly on how concerned you are about them continuing to have access to key contacts and staff.
- Remind them in writing of their pre and post-termination contractual obligations. The best contracts often act as a deterrent – avoiding the need for any legal action.
- Act fast if you become aware of any serious or potentially serious breaches. It is best to take specialist legal advice as early as possible in this situation.
- Be prepared to unleash the dogs to take legal action seeking a Court order protecting your business, if necessary.
- However, always bear possible settlement in mind. Legal action of this kind is expensive and carries risks. It is often possible to reach agreement under which an individual can move on to a different job, after an agreed period – on a restricted basis – without causing any substantial damage.
So, in summary, to protect your business from would-be defecting poachers:
- Identify your key areas of vulnerability to defectors
- Plan, introduce and maintain contractual protection
- Be prepared to act fast to enforce.
But, do please avoid the temptation to pepper anyone with shotgun pellets. This is generally frowned upon by the Courts.
Written by Rob McCreath and Katie Selves