Employment – Handling Rogue Employees (Part 2)

In Part 2 to my earlier post, I consider preventative measures that may eliminate or minimise the damage caused by rogue employees:

(1)     Pre-employment checks

Proper evaluation of potential employees (including temporary staff and consultants) in order to understand how their personal attributes, as well as skills, may impact their suitability for the position. These might include enhanced background checks.

(2)     Signing up: Restrictive covenants/ Non Disclosure Agreements (NDAs)

Consider company-wide NDAs (depending on seniority/access of employee) that prohibit the disclosure of any company details (through online, email, written, or verbal means) during and after employment for a prescribed amount of time.

(3)     Training

Effective training is vital to minimising the risks of fraud.  Ensure clear and regular training to highlight the nature/types of fraud that might arise and what the potential “red flags” are for company.

(4)     Evaluating employee performance and compensation

Employee performance reviews are a good opportunity for line managers to objectively assess employee behaviour and performance as well as identify potential issues from the outset. Consider also whether employees are being compensated appropriately and whether desired behaviour is being encouraged.

(5)     Limits to authority

Risk of fraud is reduced when an employee’s level of authority is commensurate with level of responsibility. Consider firewalls/blocking of access to certain levels of employee.

(6)     Policies and procedures

Clear policies and reporting procedures dealing with fraud, bribery and corruption and whistleblowing are imperative. For example, social media management might include:

• Reviewing employee policies to make sure they identify impermissible uses of personal information in clear language, including sanctions for violation;
• Ensuring that only employees who have a legitimate need to access personal information to perform their job functions have access;
• Establishing electronic “footprints” that track employee access to personal information and/or to make employees aware that their access is monitored;
• Considering the extent to which personal information used by the organisation can be anonymous to hinder fraudulent or improper use;
• Eliminating opportunities for employees to upload or download personal information from the system.

(7)     “Zero tolerance” culture

Regular internal communication to all levels of employees stressing a zero tolerance approach is vital.

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Sanjay A. Sakhrani

Barrister, Mediator

sanjaysakhrani.com

 

 

Employment – Departing employees still owe duties

Employers are notoriously at a disadvantage when an employee decides to leave. Whilst, it is hoped, an employer has protected its position by non-compete and other clauses in the employment contract it is clear that, beyond these measures, an employee’s duty of fidelity is not an absolute one.

Background

In MPT Group Ltd v Peel, Birtwistle and Mattress Tek Ltd [2017] EWHC 1222 (Ch), the employees were subject to restrictive covenants that prevented soliciting or dealing with customers they had personally dealt with for six months. Before leaving MPT, they copied a significant amount of the company’s data including databases of customers and suppliers, machinery drawings, manuals, component lists, price lists and discounts, sales quotations, and orders. After the six months elapsed they incorporated MattressTek Limited in direct competition with MPT.

When questioned by their employer as to their intentions when their employment terminated (six months earlier), both employees lied stating that they had no desire to go in to the business on their own account and denied going into partnership.

On the hearing of MPT’s injunction application to prevent P and B obtaining unfair advantage through misuse of confidential information, the question arose as to whether the employees were contractually obliged to answer questions truthfully about their future intentions. The Court held that the duty did not include a duty to disclose details of an employee’s intention to lawfully compete in the future (after expiration of his covenants).

It seems that whilst an employee is, during employment, subject to an implied duty of fidelity which could include a contractual duty to answer questions honestly, there are limitations on the duty. It is well known that the duty does not extend to a requirement that an employee report their own wrongdoing or that of fellow employees.

An employer cannot compel an employee to be wholly honest with it and in that event, cannot obtain the information it may need to take steps to protect itself from future competition.

Comment

It is important for employers to be aware that whilst there is a general implied duty of fidelity and good faith in any employment relationship, this does not extend to a contractual obligation on an employee to explain their own confidential plans.

The law will usually step in to prevent unfair competition or to hold employees to enforceable restrictive covenants or to protect confidential information, but outside of this a departing employee is not obliged to tell the employer about their next career move.

A clear and unambiguous express duty to disclose future plans may, in theory, provide some form of legal protection if the employee misleads an employer.

Had the employees been company directors the tribunal would have decided differently – fiduciary duties owed by the most senior individuals within a company often include disclosing an intention to compete.

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Sanjay A. Sakhrani

Barrister-at-Law

www.sanjaysakhrani.org

Employment – Non-compete clauses must be current

Most employment contracts incorporate some form of future restriction on employees after they leave their job. It is common for low-level employees to be restricted from working for a competitor for a period of 1 to 3 months. A more senior employee or partner may have a 6 to 12 month restriction.

For non-compete clauses to be enforceable, they must be reasonable and can go no further than to protect the employer’s legitimate business interests.

Invariably, the employee will progress within the organisation. However, if the clauses and restrictions are not commensurately updated to reflect the employee’s seniority from time to time, their enforceability can be challenged. It is vital to consider appropriate restrictions at the start of each stage of an employee’s career.

Employment tribunals, when considering the enforceability of a restrictive covenant, are required to consider the job role of the employee at the point when the covenant was entered. This means, when an employee joins an organisation, the covenant must be appropriate for the role in question. The employment relationship is an evolving one and the restrictions should evolve with the employee.

Cases

It appears that a non-compete that is too long for the position (e.g. 12 month restriction for a low level employee) will not be enforceable at all, even if that employee moves up to a senior rank. This is because the clause is unreasonable from the beginning and cannot become reasonable: Patsystems Holding Ltd v Reilly (2012).

If the clause is relatively short for the position (eg. 3 month covenant for a senior position), the Court will only enforce that shorter period and not impose a longer one even though the employee is in a senior position at the time of leaving: Bartholomews Agri Foods Ltd v Thornton (2016); Egon Zehnder Ltd v Tillman (2017).

Comment

An unenforceable non-compete clause enables an employee (in whom considerable resources have been invested) to cross over to a competitor without any restriction, potentially causing great harm to the organisation. Given that courts will generally err in favour of freedom to compete it is, therefore, crucial to evaluate the restrictions regularly and update them so that they are regarded as reasonable, thus protected.

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SANJAY A. SAKHRANI, Barrister-at-Law

http://www.sanjaysakhrani.org

 

 

Employment: Amending restrictive covenants – a reminder to employers

Decorus Ltd v Daniel Penfold & Procure Store Ltd [2016] EWHC 1421 (QB). The full judgment can be found here: http://www.bailii.org/ew/cases/EWHC/QB/2016/1421.html

As suggested in some recent authorities (Bartholomews Agri Food Ltd v Thornton [2016] EWHC 648; Pat Systems v Graeme Neilly [2012] EWHC 2609) consideration must be present when post-termination restrictions are amended or revised. This case reiterates the importance of providing such consideration.

Background

The employee (Penfold) commenced employment in 2012. His employment contract contained the usual covenants, including non-compete and non-solicitation restrictions  of 9 months (the “Restrictions”).

In April 2013, Penfold was granted a pay rise.

In May 2013, a new employment contract was signed by Penfold, which contained a reduced period of the Restrictions to 6 months.

After it was discovered that Penfold had committed certain breaches, Decorus sought to enforce the restrictive covenants in the 2013 contract.

Penfold’s argument was based on his belief that the Restrictions in the 2012 contract were too long and unenforceable ab initio – as such they could not be revised unless supported by consideration.

His main argument was that there had been no consideration when the 2013 contract was signed – he stated that the April 2013 pay rise could not have been supported by consideration since at the time it was granted, the proposed new contract had not materialised.

The Court however linked the pay rise with the new contract and held that consideration had been established. It pointed out that the 2013 contract was “always expressed to be a part of a three phase process”:

“Mr Penfold had an appraisal which he had not had before. That was the first part of the process. Thereafter, in April 2013 the accounts department were directed to increase his salary, although under The 2012 Contract the date for salary review was in January. Mr Penfold was provided with a draft contract, urged to read it carefully before signing it and Mr Sheppard’s evidence was that if Mr Penfold had not signed the contract his employment would have been terminated. Mr Penfold did sign the contract and continued in employment at the increased salary. Taken together the appraisal, pay rise and continued employment amount to valid consideration for The 2013 Contract.”

All in all, the Court agreed that consideration had been given in the form of a pay rise and continued employment.

Commentary

I suggest that this was a borderline case. It is likely that the Court was swayed by the activities engaged by the employee after he left, which compromised Decorus.

The employee clearly took advantage of the employer failing to focus on the real effect of the three phase process. Indeed, his argument was quite an ingenious one in trying to uphold the earlier restrictive period of 9 months as it would have been unenforceable in any event. He would thus have been freed up to carry on any activity post-employment with Decorus. I would suggest that the employer was lucky on this occasion.

This decision will remind employers of the importance of the clarity of drafting and tightening language where necessary.

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http://www.sanjaysakhrani.org

Post-termination restraint cannot be “bought” by employer

In Bartholomews Agri Food Ltd v Thornton [2016] EWHC 648 (QB), the English High Court recently held a post-termination restriction in an employee’s contract of employment to be unenforceable. The case is notable for a clause, which the Court struck down, enabling the employee to receive full salary from the employer provided he abided by the (unenforceable) restriction.

The link to the full judgment can be found here: http://www.bailii.org/ew/cases/EWHC/QB/2016/648.html

Background

The employee (T) joined Bartholomews in 1997 as a trainee agronomist. Clause 10.2 of his contract of employment read:

10.2 PROTECTION OF KNOWLEDGE ACQUIRED DUE TO THE COMPANY’S SPECIALISED BUSINESS

Employees shall not, for a period of six months immediately following the termination of their employment be engaged on work, supplying goods or services of a similar nature which compete with the Company to the Company’s customers, with a trade competitor within the Company’s trading area, (which is West and East Sussex, Kent, Hampshire, Wiltshire and Dorset) or on their own account without prior approval from the Company. In this unlikely event, the employee’s full benefits will be paid during this period.”

In other words, the employer purported to prevent T engaging in work supplying goods and services “of a similar nature” to its customers for a period of six months immediately following the termination of his employment. The employer also agreed to give him full pay during the period of the post-termination restriction.

T resigned and intended to start working for a competitor. Bartholomews sought an interim injunction to prevent him from dealing with its customers.

Decision

The High Court refused the injunction, ruling that the restriction was in restraint of trade and unenforceable. It decided on three grounds:

First, the restriction was imposed in 1997 when T was a trainee with no experience and no customer contacts. The term was adjudged to be “manifestly inappropriate” for a junior employee and would remain unenforceable even if the employee had subsequently been promoted to a role in which the restriction would have been reasonable – Patsystems Holdings Limited v Neilly: http://www.bailii.org/ew/cases/EWHC/QB/2012/2609.html.

Second, the scope of the restriction was plainly far wider than was reasonably necessary for the protection of the applicant’s business interests. It applied to all Bartholomews’ customers, regardless of whether T had knowledge of them and regardless of whether he had ever carried out any work for those customers – he only dealt with 2% of the customer base and this restriction prevented him from working with the 98% that he never came across.

Third, the fact that T would continue to be paid in full during the period of the restriction did not save the clause. The Court held that it is contrary to public policy to permit an employer to purchase a restraint of trade.

Commentary

It is commonly known that restrictions on post-termination activities have to be drafted cautiously and should be with the benefit of legal advice. Clauses will only be enforced if they go no further than is necessary to protect the company’s legitimate business interests such as its customers, trade secrets and confidential information.

The Court suggested that the covenant might have been reasonable if it had referred only to those customers with whom T himself had dealings (i.e the 2%). Clause 10.2 however was wider than reasonably necessary.

Restrictions are not usually appropriate for junior members of staff and should always be reviewed on promotion. As the Court reiterated, having decided a similar point before, “if a restriction was unenforceable when entered into, it does not become enforceable over time” if the employee rises through the ranks to a role where the restriction might be considered reasonable. Even if the restriction was enforceable when entered into, it might not provide adequate protection for the company when the employee is more senior.

Hong Kong

Whilst not Hong Kong jurisprudence, it is advisable for employers to take heed of this recent English decision. The relatively high turnover of employees in various local industries might tempt employers to try and hold down their staff (usually secured after much effort) for as long as they can, including even paying to stop going to the competition – where garden leave is not possible – but employers should now bear in mind that such a clause will unlikely hold up to court scrutiny.

When updating restraints during employment, employers need to ensure that they provide a real benefit to the employee in return for him agreeing to the new restraint – e.g. a pay rise/promotion/more responsibility. If this is not done, then it might mean that the restriction is unenforceable: see Re-Use Collections Ltd v Sendall (2014) (http://www.bailii.org/ew/cases/EWHC/QB/2014/3852.html).

Ultimately, tighter drafting and reviewing terms when an employee comes through the ranks will invariably support long term strategies of employers.

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www.sanjaysakhrani.org

Ex-broker held to post-termination restraint

GFI (HK) Securities LLC v Gyong Hee Kang

Civil procedure – interlocutory injunction – inter-dealer broker – restraint against ex-employee – whether damages adequate remedy – balance of convenience

This was a judgment of Deputy High Court Judge Saunders. The full Reasons for Decision can be found here: http://legalref.judiciary.gov.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=99092&QS=%2B&TP=JU

Background

A senior financial broker working on GFI’s Korea desk was bought out of her contract by ICAP (the 2nd Defendant). She had earlier signed an employment contract with GFI which contained the following post termination restrictions (in broad terms):

(i) Non-compete: for 6 months immediately after termination of the contract not to be involved in any relevant business, defined as any business carried on by GFI at the termination date (clause 15.4);

(ii) Non-deal: for 6 months immediately after the termination of the contract not to accept will facilitate the acceptance of orders or instructions from any person who in the previous 12 months had been a client (clause 15.5.1.2);

(iii) Non-solicit: for 6 months immediately after termination of the contact not to directly or indirectly canvas or solicit business from any person who was a client of GFI in the previous 12 months, nor to accept or facilitate the acceptance of orders or instructions from any such client (clause 15.5.1.1).

The ex-employee raised three arguments in resisting the injunction application: (1) Non-compete: if this were pursued, this would entirely prevent her from working. (2) Delay: GFI did not act within a reasonable period of time, as required. (3) Restraint: a 6 month restraint was not reasonable and would be unenforceable.

Analysis

(1) Non-compete – GFI agreed to abandon this claim.

(2) Delay – the Court agreed that an interlocutory injunction must be sought without delay: King Fung Vacuum Ltd v Toto Toys Ltd [2006] 2 HKLRD 785 at 792, §20:

“There has traditionally been a strong requirement when interlocutory injunctions have been sought, that the plaintiff must show that it has acted promptly and without delay. Promptly in the circumstances of interlocutory injunctions has been commonly understood to be a period of 6 weeks or so of unexplained delay and 3 months with an explanation for the delay in making application for an injunction. …. It stands to reason that if (a plaintiff) is prepared to allow matters to proceed and takes no action with respect to matters which have been extant for lengthy periods, it lies ill in (the plaintiff’s) mouth to say that there is likely to be in repairable damage.”

However, it accepted that the time it took for GFI to properly gather evidence to mount an application was reasonable. Hence there was no delay found here.

(c) Duration of restraint – Saunders DCHJ accepted that, at an interlocutory stage, the question to be asked is whether it is plain and obvious that the restraints will fail after an examination at a trial.  If it is not plain and obvious, the clauses must at this stage be regarded as having a reasonable prospect of being upheld: see Arbuthnot Fund Managers Ltd v Rawlings [2003] EWCA Civ 518, at §30, per Chadwick J.

The judge held that it was satisfied that GFI had a reasonable prospect of success at trial in establishing that the restraints are reasonable and no more than necessary.

Commentary

Sauders DCHJ considered the matter from an inter partes perspective such that he did not analyse with any depth the reasonableness of the restraints in this case. Having applied the “plain and obvious” test (see above) to meet the low threshold needed at the interlocutory stage, it is arguable whether GFI would succeed at trial where the thresholds would be much higher.

Clearly the timing of the ex-employee’s employment with ICAP cannot be disregarded. She left GFI’s employ on 17 February 2015 and her employment with ICAP commenced on 18 May 2015 – a 3 month period. IPAC’s advisers likely advised that a 3 month restraint was reasonable and any longer period of restraint was not enforceable – hence the fact that this matter went to hearing.

Whilst this may in fact turn out that 3 months is the reasonable period after trial, IPAC took the wrong approach, knowing the lower threshold requirements in injunction applications as to ‘reasonable prospects of success at trial’.

In my view, I would suggest that a 3 month restraint is a short one. That said, it was certainily not worth taking the risk to defend it without ample authority being cited to the Court (which seems to have been lacking from the judgment itself).

ICAP would have been properly advised to be cautious in resisting the temporary injunction (and should have done so in correspondence before any proceedings were instituted). It is never clear cut where a short period of restraint is being defended. Indeed the Court here considered a number of cases where the 6 month restraint had been upheld and was easily able to be satisfied on the lower test.

What could the ex-employee have done? There is no doubt that the ex-employee could have been engaged in a non-conflicting advisory role, in the background, before her legitimate period of restraint of 6 months had expired. Indeed, this is what she might have to do in light of this decision.