Please release me
9 September 2002
15 January 2014
4 November 2013
4 December 2013
Ensure restrictive covenants in a sale agreement are enforceable (as the courts won’t do it for you)
19 August 2014
9 May 2014
The recent High Court battle between the two broker giants and bitter rivals Cantor Fitzgerald and Garban-Intercapital, part of Icap, provides a cautionary tale of how not to keep hold of talented employees in a bitterly competitive market. For example, it is probably not a great idea on getting wind of the impending departure of one your top brokers to inform him that he would have to work "every f****ing day of his contract" before he could leave. That was the blunt message that Cantor managing director Daniel La Vecchia delivered to Ed Bird, one of the three interest rate brokers that Icap stole away in what one of their own executives described as a "heist".
Mr Justice McCombe delivered his judgment in the High Court last month. He ruled that, while Garban-Intercapital had unlawfully induced one of the three brokers to leave Cantor, he dismissed Cantor's claims against the other two, saying that the head of Cantor's London office had behaved "disgracefully". Cantor, which lost 658 employees on 11 September, was found to be in breach of its contract with two of the three brokers in so far as it had changed their remuneration schemes, scrapping the brokers' salaries and replacing them with a commission-only scheme.
Despite such revelations, evidence suggests that employers are now putting as much thought into keeping hold of their staff as they used to in getting shot of them. Increasingly, they are turning to garden leave clauses. "It's the best protection an employer can possibly get - much more wide-ranging than restrictive covenants," says Paul Mander, a partner at Berwin Leighton Paisner, who acted for the brokers in the Cantor saga.
Last month's judgment exposed the devious and determined poaching tactics common to the City. It was Icap's chief executive Michael Spencer who said in an email that he would "love to plan a heist". Also by email, he wrote about poaching Cantor staff, saying: "I would love to put one up their bottom and this is the time I have been waiting for for just five years."
Mander says that aside from "a prurient interest within the media into alleged City lifestyles", the case also makes the point that employers cannot expect to deal with staff in an aggressive and misleading manner and get away with it. "It's a pretty salient example of the situation in which an employer does have to trust its staff in an appropriate and fair way, because not doing so simply leads to an employer losing all its long-term protection," he adds.
No doubt companies in the Square Mile will be ringing up lawyers and sharpening their contracts to avoid becoming the subject of such embarrassing and tawdry revelations. "One lesson from the Cantor Fitzgerald case is that employers could use garden leave more effectively and probably achieve what they wanted without necessarily needing to go through expensive tranches of litigation," comments Martin Palmer, an employment law specialist at Allen & Overy (A&O). A garden leave clause is simply one that allows an employer to require an employee to stay at home during their notice period.
Corinne Alridge, the head of employment at Bird & Bird, who specialises in enforcing and defending restrictive covenants for City clients, reckons that "nearly everyone will go on some form of garden leave at some point" in the banking and broking sector. "It's a cut-throat business and the top players are always fought over," she adds.
Palmer points out that such provisions have become more commonplace as post-termination restrictive covenants have become increasingly difficult to enforce in the courts. Such covenants take a variety of forms and their aim is to prevent a former employee from divulging confidential information, working for a competitor or enticing customers away.
He explains: "Restrictive covenants have always been quite difficult to enforce because they're ultimately based upon showing [to the court] that keeping someone out of work for a period of time offers no more than reasonable protection of a company's legitimate business interests. That has proved quite a hurdle for a lot of companies to overcome."
By contrast, Palmer points out that garden leave has proved more attractive. "While someone is on notice you can get them out of the office and subject them to all of the same duties they would have owed to an employer, such as a duty of loyalty and confidentiality and so on," he says. "At the same time, it stops them from physically going to someone else."
Of course, such provisions have their own limits - not least that a garden-bound employee will be entitled to their full pay and benefits package. "That's the key point - you have to pay for it," says Jane Mann, former chair of the Employment Lawyers Association and a partner at Pattison & Brewer. "You're only going to pay if the value of the person is such that you really don't want them to leave to join a competitor because you fear damage to your own business."
Mander makes the point that in the Cantor case - where unusually there were no garden leave clauses - there were provisions that the employer would pay if a 'no-compete clause' was activated. "What companies often say now is that it will continue to pay your basic draw [the non-commission-based element of the salary] for the next three months, and then it can enforce the covenants," he says.
There is another major limitation for garden leave. "It's not enough to say that an employee is a valuable worker and going to a competitor; you then have to show it would cause damage to your business by them joining a competitor," Mann explains. "Not simply by competing, but it's also through taking away something that really belongs to a business; and what belongs to a business are its connections and the stability of its own workforce."
The courts are unlikely to enforce garden leave for a duration of more than six months. But once again, there is an advantage over restrictive covenants, as the courts are more flexible over the length of time of leave they enforce, whereas their approach to restrictive covenants tends to be all or nothing. Alridge acted in the leading case of GFI Group v Eaglestone (1994) concerning a foreign exchange options broker who wished to join a competitor before his 20-week notice period had expired. An injunction was granted for 13 weeks.
"There is some discretion in the courts to decide how long they want to keep an employee on garden leave for, whereas restrictive covenants are either enforceable or they aren't," says Alridge.
The most recent and most significant case on garden leave was William Hill v Tucker (1998), which involved a senior trader in William Hill's spread-betting business. Tucker was required under contract to give six months notice, but announced his intention to join a competitor within a month. Both the High Court and the Court of Appeal refused to grant an injunction requiring Tucker to remain on garden leave. According to Paul Quain, an employment law specialist at Charles Russell: "The court said William Hill was actually breaching the contract by not allowing the employee to have the right to come into the office even though he was being paid."
The appeal judges concluded that, without an express clause and in a case where an employee had unique skills requiring constant use to prevent them "atrophying", no implied right to put such a worker on garden leave existed. But the case could have implications beyond specialist City workers. "Although [Tucker] was a specialist, there are lots of comparisons that can be drawn with other employees - everyone's skills atrophy over a period of time," Mander notes.
But Alridge says that in her experience the courts are rarely sympathetic to employees. "The people who often appear before the courts are very high earners. So if it's someone who's on, say, between £300,000 and £400,000, and they're effectively being paid to stay at home, most of us would regard that as quite nice," she says. Indeed, more employees are beginning to regard enforced leave as another perk of the job. "When I first did garden leave cases employees hated it, but now quite a lot of them look at it more positively because it means they can have a break and get paid for it," she adds.
Last year such esoteric employment law issues hit the headlines of the sports pages when Steve Bruce, the new Birmingham City manger, was forced to spend a seven-week spell in the potting shed after Crystal Palace chairman Simon Jordan refused to let him break a five-year contract. According to Palmer at A&O, it was an example of how effective a remedy garden leave can be for employers.
"Jordan played a good tactical game," Palmer reflects. "Crystal Palace and Birmingham City were both competing for prominent places and by launching High Court proceedings against him and applying for an interim order from the court, because there were certain interests in relation to being a football manager that were worthy of protection, it was deemed reasonable for him to be taken out of the workplace for a period of time."
The case also makes the point that garden leave is not merely the preserve of the City worker. "It's relevant for any key person in a organisation," says Mann. "It could be people at the top of companies, but it could also be research chemists, or simply because an employee has charisma or they are just superb managers."
Mander adds: "It's always worth having in a contract because it doesn't cost you anything to put it in there. It's something to fall back on because it gives you a lot of protection if you do need it."
Of course, law firms also now routinely employ such provisions, but there has yet to be a high-profile case enforced in the UK courts. But it is not unheard of elsewhere. US firm White & Case, for example, became embroiled in a court battle over an insolvency team that its Hong Kong office was trying to recruit from Deacons in July.
Deacons filed a suit alleging that White & Case illegally approached four of its partners in breach of a non-recruitment clause in an agreement dating back to 1999, when the two firms were in merger talks. Deacons has a reputation for holding employees to their word and previously persuaded the court to uphold a five-year restrictive covenant against a former Deacons lawyer. The trial is due to start today (9 September).
So far, though, there has been no such high-profile litigation in the UK courts. "I wonder whether it's because lawyers tend to be more relaxed about these things," comments Quain at Charles Russell. "In the day-to-day practice the City firms tend to just be annoyed, but release people despite any restrictions. Life's too short and we have to get on and make the best of it."