“Ordinary and lawful recruitment” or Unlawful team move- issues to consider

By Wonu Sanda and Merrill April

In recent months two global investment banks found themselves embroiled in a public English High Court legal battle, with almost £6million at stake, over the alleged team move of six employees from Stifel Nicolaus to its competitor, Jefferies International. Such tussles are not unusual in the financial service industry, where substantial investment in a skilled cohesive workforce and nurtured client relationships are the driving engine of the business.

It is no wonder then that when employees defect or are recruited en masse to a rival competitor, the business will be keen to ensure damage limitation. This may include mitigating against the potential risk of client business following closely after the employees. In this article we discuss the range of legal and practical responses at the disposal of an employer faced with a team move and what they can do to protect against a team move in the first place.

What is a team move?

A team move is when two or more people coordinate to leave a business to join a competitor or set up in competition with their former employer. The team can comprise of senior managers, junior colleagues and sometimes support staff, usually led by one or more main orchestrator(s).

It is theoretically possible for a group of employees to move to a new company legitimately and lawfully, if handled carefully. However, often a team move will involve a degree of covert coordination with other team members, the new employer and sometimes recruitment agents acting as intermediaries to facilitate the move. It may also involve employees seeking to unlawfully remove, retain and misuse the employer’s confidential information for the benefit of their prospective new employment. As a result, team moves often risk the departing employees breaching various obligations owed by them to their former employer, such that they, the new employer and potentially the recruiting agents could find themselves at the wrong end of court proceedings.

Responding to Team Moves – legal options

An employer who suspects a team move is in progress, may wish to consider whether they can bring claims against the offending employees or potential new employer to thwart the unlawful conduct in its tracks or at the very least mitigate the harm to the business. This may involve swift legal action, including:

  1. seeking an injunction to force the employees to comply with their contractual restrictions and potentially prevent the team move from taking place until the relevant restrictions expire;
  2. seeking a court order to stop employees who have already breached their obligations from soliciting or dealing with clients, recruiting further team members, or even from joining the new employer at all for a period of time (this is known as a springboard injunction and is aimed at preventing the team gaining an unfair advantage from their wrongdoing);
  3. compelling the return of confidential information (delivery up);
  4. claiming damages as recompense for loss suffered by the business; or seeking an account of profits (where fiduciary duties, as discussed below, have allegedly been breached).

However, in order to establish the basis for such claims the former employer will have to show that the team members have or may have engaged in relevant unlawful conduct. For employees this is likely to be based on actual or threatened breaches of their express contractual duties, often found in employment contracts. For example confidentiality clauses, which usually prevent employees from disclosing or misusing confidential information. This could potentially include the employer’s database of client information or requirements, technical knowhow, or a business plan which could be damaging in the hands of a competitor. An employee’s contract may also restrict them from working for or having any interest in any other business during the course of their employment, without the permission of the employer (albeit there is usually a small exemption for holding a minor passive investment).

Additionally, directors and senior employees often have express duties of good faith to act in the best interests of their employer in preference to their own interests. This may require them to disclose their knowledge of a threatened team move, a colleague’s attempt to divert business and possibly ‘self-incriminate’ by disclosing their own wrongdoing to their employer. Equally, employee contracts may include garden leave clauses, which can be relied upon by an employer to, amongst other things, keep impugned employees away from the office (or virtual office) during their notice periods; isolate them from any remaining flight -risk employees; and prevent them from accessing the company’s email and internal systems. Further post-termination restrictive covenants (discussed below) may form the basis of potential claims.

Even if an employee’s contract does not contain any relevant express terms, an employer may nevertheless be able to rely on implied terms as the basis of a potential claim. All employees are likely to have an implied duty of fidelity and a duty not to misuse their employer’s trade secrets either during or after their employment (potentially an employer’s proprietary algorithmic trading models or financial information, for example). For directors and senior employees an added layer of obligation may be implied in the form of fiduciary duties, which are typically reflected in the express good faith duties mentioned above and which requires undivided loyalty (such that any threatened competitive activity would need to be disclosed to their employer).

Importantly, as Jefferies International discovered, it is not just the employees at risk of being sued. The new employer (and possibly recruitment agents) may also face being joined as defendants to potential legal action if they are unlawfully involved in the team move. This may include claims including but not limited to, inducement of breach of the employees’ contracts, conspiracy and claims related to the misuse of confidential information. Prospective employers should therefore take advice on their positions and ensure they are aware of and do not turn a blind eye to any obligations and any enforceable restrictions owed by their newly recruited employees to their former employer.

Responding to Team moves – practical action

As well as legal action there may be a range of time-critical practical measures that an employer may wish to take to try to stop or quell the potential adverse consequences of a team move. A typical response will involve obtaining specialist IT forensic assistance to conduct a forensic analysis of an employee’s emails or electronic devices and potentially uncover relevant evidence of a team move, for example revealing emails or mass downloads of company information. The employer will need to carefully check their policies and procedures to ensure they do not breach any obligations owed to the employees in the process. If an employee is put on garden leave, as mentioned earlier, or on restricted duties (if permissible under their contract) that time may give the employer the opportunity to gather such evidence with a view to putting roadblocks in the way of a potential team move.

Many employers may also consider trying to ‘turn’ the decamping team (or certain key individuals) to persuade them to stay with the company, by offering increased compensation and benefit packages, offering promotions or promising to address other concerns. Of course, many employers will also wish to prioritise safeguarding clients too, which may involve a ‘love-bombing’ campaign to bed down key relationships and deter clients from leaving for a competitor. Further, giving prompt written notice to employees and their potential new employer, of their obligations, restrictions and the consequences of breach may deter them from attempting any potential wrongdoing.

Prevention is better than cure

It is preferable for employers to consider and include well drafted restrictive covenant terms in their employees’ contracts of employment, as a protective measure against any potential team move, well in advance of needing to rely on them.

Relevant restrictive covenants can include terms to prevent employees for a period (typically up to 12 months) from joining a competitor, soliciting or dealing with colleagues and clients, and moving to a company that an ex-colleague has recently joined (an ‘anti-team move’ provision). Importantly however, employers should ensure they take advice and tailor the restrictions to their business and the employee, as only restrictions which protect a legitimate business interest (such as trade secrets, business connections and workforce stability) and which go no further than is reasonably necessary to protect those interests will be valid and enforceable. Employees and employers in some areas of the financial industry will no doubt be familiar with such restrictions, as their entitlements to equity benefits and incentives can often be conditional upon compliance with them. If an employee breaches their restrictions on departure they could therefore be at risk of the employer forfeiting their valuable benefits. If the recruiting employer offers to replace these lost benefits and incentives, additional issues arise as mentioned above.

Conclusion

For many businesses a team move, whether spearheaded by a predator competitor or resulting from an in-house uprising, can feel like the house has been gutted, leaving behind an empty shell. It may result in loss of talent, a new competitive threat and may ultimately be damaging for the business’s bottom line. When such circumstances occur an employer may have a range of legal and practical measures open to them to stop the team move train running away, apply the brakes and protect the business. But they will need to act quickly, and prudently and would be well advised to take specialist legal advice.

About the Authors

Wonu Sanda is an Associate specialising in partnership and employment law. She has advocacy experience in employment tribunal proceedings and regularly works with Partners to advise on a range of issues in employment and partnership disputes and exits, including enforceability of restrictive covenants in traditional partnerships and LLPs, discrimination, whistleblowing and jurisdictional issues.

Merrill April is a Partner specialising in employment and partnership law. She have developed an international employment law practice which covers both contentious and non-contentious matters and advise both senior executives and employers across a diverse range of sectors such as financial services and technology, and consisting of both listed and private companies. She advise UK PLCs on hires and departures at board level, and on contractual and other issues that arise throughout the employment relationship, including in relation to whistleblowing and data protection. She is an instrumental in setting up employment and HR structures to support businesses, and She work closely with HR consultants and in-house HR teams, finance directors and in-house lawyers to achieve this objective.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.