I am joined today by Jonathan Maude, Employment Law Partner at Vedder Price to discuss a very contentious recruitment practice, namely, team moves. This is a follow-on conversation from our previous discussion regarding non-competes to understand what are the legal implications and risks associated with team moves.
Team moves can work out very well however from a recruitment perspective they are very complicated with lots of moving parts. We thought it would be useful to invent a scenario and discuss the various different legal implications from a UK law perspective.
The Portfolio Manager
In this scenario we'll discuss a Portfolio Manager. Let's call him Matt.
Matt has been a Portfolio Manager within a multi-strategy Hedge Fund for four years. He joined and built his own team and the team have deployed their own strategies. They've been very successful and for various different reasons (capital allocation, risk limits) Matt is now thinking about making a move to a different platform. Matt would ideally like to bring two or three of his team with him.
What are the big legal risks that Matt should be considering and is it worth it?
Jonathan: First we need to understand, what is the contractual position with his current employer and with his team. Last time, we discussed non-compete provisions and they're usually detailed in the restrictive covenants section. In that covenants section there should also be clauses which prevent employees working with former colleagues. They need to be at a certain level of seniority and you can't work with them for six months or maybe even a year after you leave your current employer. The place to start is whether the contract has express terms in it which may govern this scenario.
Employment relationships generally are governed by what we call Express terms and Implied terms.
Express terms are the clauses which are stipulated in the contract at the outset. These are things like these restrictive covenants which will relate to working with former colleagues or former clients. Generally speaking they are much more enforceable than non-compete provisions.
Because with non-compete provisions, the court will say an employee should be entitled to work elsewhere. In this scenario however there is no need for Matt to work with his former colleagues at the new employer. So, you may consider these clauses as being more enforceable than a non-compete provision.
But the point is that you've got to look at the contract to understand what that clause says about former employees. To be reasonably enforceable the clause should refer to a level of employee. For example, you might say “a Trader, or above, with whom you have worked during your final 6 months of employment”.
That would be far more enforceable than a clause which refers to “any employee” at the previous employer. It's about narrowing down the employees that you're trying to protect. So that's the first place to start.
In this scenario, are there other clauses in the employment agreement that Matt is in breach of just by considering a team move or maybe discussing that with the team? Would that be inciting people to leave the organization?
Jonathan: It's a great question because there are two issues to think about. I've seen more recently, in these contracts, again talking about the express terms
"there are clauses which say that there is an express requirement on an employee to tell the employer if it becomes aware of a team move discussion".
That is an Express Clause in the contract however it is rarely enforced. If that clause existed in this scenario both Matt, and his team, should technically be talking to the employer if that conversation happened. So it's a big risk for Matt in terms of having that initial chat.
In addition to these Express terms, there are Implied Terms. These are terms that courts, over many years, have thought would be a good idea to have in a contract in an employment relationship.
So these aren't expressively written down, these are just things that apply.
"For example, trust and confidence should exist between an employer and an employee but also there should be an obligation of good faith between the employer and employee both ways".
And so the position would be that in having these conversations, he would probably also be breaching those implied terms as well. So even if the contract itself doesn't have this express requirement to alert the employer, then these implied terms would still be implied. So there is an underlying obligation of good faith and underlying obligation of trust and confidence. If you're going to act against the employer’s interests, then the chances are you're going to be breaching those as well.
What will be the repercussions of that though? Because in this example Matt is thinking about leaving anyway, would the repercussion be ‘Okay, we're terminating your employment agreement and we're firing you’ but if he's on his way out anyway, should he care. Is there any other kind of legal mechanism or repercussion that the employer can pursue?
Jonathan: It depends on the contractual terms and that's always the start point. But effectively what could happen in this scenario, Matt talks to one of his team members, they inform their employer and then it goes through a very short misconduct process and they fire him, it's gross misconduct.
You could then say well, okay, that's great for Matt because he's able to go somewhere else. But the fact is that if he has been in breach, then those restrictive covenants (if they exist) will continue to apply. So even though there's a termination, the clauses would continue to apply to restrict him.
It's a different situation, if the current employer breaches the contract. If the current employer breaches the contract then the court will not allow an employer who is itself in breach to rely on these continuing restrictions. But If Matt breaches, then it's a different situation.
Let's just say Matt talks to his team, they are onboard for a move and they start to interview in other organizations. Is there any risk for the future employer and should the future new employer be interviewing these individuals as a team or as individuals? Because if they interview as the team obviously that’s implied that they in on the move or is there any kind of sensible way of doing it?
Jonathan: The big issue here for the new employer is that there is an argument that they are encouraging or inducing the breach. It can be difficult for the current employer to prove however because you still have to prove the fact that the new employer has actually encouraged a breach. So that feeds into the question because if you start interviewing everybody together, then that's going to look like you are encouraging everyone to move.
So if I were advising the new employer, the position would be to first look at the existing contract, understand what the current clauses are. There can be obligations in contracts to disclose these terms to a prospective employer as well.
From a new employer point of view; you may think Matt's a great guy and he may be telling you that his team is brilliant, but ultimately they've still got to fit into your work environment. So I always think it's much better to take people on a case-by-case basis and make sure that they all stack up individually, and therefore my advice would be to interview them separately and make separate decisions but knowing that ultimately they will work together, so they should all get on.
So the team have interviewed in a few different places and decide to accept an offer. Next comes the dreaded resignation. I've seen a few ways that this happens including the big bang – where everybody goes into the office to resign and it all happens on one day. I think that makes sense from a team risk perspective because there's less opportunity for senior management to buy back other members of the team but are there legal reasons why everybody would resign on the same day?
Jonathan: I think it very much depends on company prerogative and what the new employer wants to do and how it wants to approach it. The legal position is obviously going to be relevant because ultimately it depends on how a new employer has interpreted Matts restrictions. If they feel, for whatever reason, the restrictions are unenforceable or don't apply, then in that context they would probably take a much more aggressive approach. If the business requirement is to get up and running and they take the view ‘we're going to make a significant profit per month”, then it's worthwhile just getting on with it and worrying about the flack as it happens.
One of the largest cases in this area related to Tullett Prebon vs BGC. That case went on for 12 years. It involved two rival broking houses and the issue here was also personal. When you have an employer and prospective employer in the same market who can't stand the sight of one another, then you tend to find that generates a bit of aggression and anger.
So, there's a lot that goes into the mix and there isn't a case that will ever be the same. It really depends on what approach the prospective employer wants to take.
Okay so there's no set formula for resigning. In our scenario, the team have resigned and the former employer isn’t happy about the situation. What are the steps that the former employer can take?
Jonathan: The former employer would make a move with regards to both the employees and the new employer. What would happen is (and this very much depends on the speed and frankly the values involved) that the former employer would put in writing it's disappointment and it's frustration with the situation and demand that this move doesn't happen. Obviously if there is a breach of the express terms we've already discussed, then you'd ask the employees to give an undertaking that they will cease and desist and also seek cooperation form the new employer to retract the offers of employment.
Invariably, once that happens, both sides advisors would talk to one another and try to sort it out. Most of these things usually gets sorted at this point because legal proceedings aren’t in anyone’s interest. Especially from a PR point of view but also costs and everything else.
"But if the team continue regardless then ultimately the former employer can start proceedings using the high court".
They would issue a claim form and that claim form would then look to have certain remedies in it.
This could include damages i.e. the value of the loss that's going to be caused by this move which you need to be able to prove. So again, if you can show, a million dollar profit per month for this team, then technically speaking that could be your loss and that’s what you would try to recover.
Usually what happens is that there would be an application for an injunction, effectively an order from the court to stop the team going to work for the new employer.
An injunction sounds very scary and it is to a degree but ultimately it’s a holding order by the court. So you go in before a judge, it's a very small hearing, and you tell the judge the facts such as ‘this is the team, they're moving here’ and the judges are asked to give a restraining order to stop everybody, throwing cold water on everything for usually 2 or 4 weeks.
In which time everyone will go away, there's quite a lot of discussion and usually you work something out. But if you still can't, you have to then come back to court. They make a decision as to whether there's a triable issue and then you get on and have a quick hearing usually within three or four months to make a decision about things like; are the covenants enforceable? Are these people in breach? Should they be stopped? Did the new employer induce a breach of the contract?
I'm assuming non-solicitation clauses are fairly standard - you're either in breach or you're not?
Jonathan: Not really. First of all you need to establish whether they're reasonable or not.
And then you still have to prove a breach which can be quite difficult. Coming back to the Tullett Prebon case, that's where you're looking at mobile phone records. You've got to show some sort of paper trail/consensual activity. And in that case, rumour has it, phones were thrown in the River Thames. So, there are a number of hurdles the former employer has got to go through and it is a case of hoping people will tell the truth in proceedings, but that doesn't always happen.
So it's just about being able to prove it which is often the most difficult thing.
Jonathan Maude is a Partner at Vedder Price and a member of the Labor and Employment group. He leads the group’s employment team in the firm’s London office.