Inevitably, talent is going to leave. Whether they are departing to start their own organisation, embark on another chapter in their life or join a competitor, all employers will feel the sting of losing their heavy hitters at some point.
At a recent conference, law firm Holding Redlich outlined the potential damages to an organisation when an executive moves on, as well as how they can minimise risk.
Stephen Trew, partner at Holding Redlich, stated that organisations risk the loss of intellectual property, “know-how”, strategies and sensitive information, as well as contacts and goodwill when an employee leaves. It may also damage staff morale and result in other workers leaving.
“Once you get one or two leaving the fact is employees [think]… ‘maybe I’m missing out on something too if others are leaving’,” he said.
All of this can also result in a competitor gaining an advantage. Departing executives who wish to stay in the field will invariably either start a competitive organisation or join one, bringing with them the assets they have accumulated from their former employer.
A key tool used to prevent this is a restraint of trade. This is a contractual term which limits the commercial activities of an individual. This can be during employment, but predominantly applies afterwards. These often appear in employment contracts, but may also appear in other agreements such as shares or separate agreements regarding confidentiality.
Jennifer Teh, senior associate at Holding Redlich, stated restraints of trade can protect an employer from a number of risks – but it must protect a legitimate business interest. The three areas recognised by the courts include confidential information, customer connections and staff connections.
Restraints of trade often specify a period of time (six-to-twelve months) in which a former employee cannot work in the one field. The necessary amount of time will vary depending on the organisation. For example, IT may need less time, as the field is in constant change.
Employers should also take note that their restraints may not apply if they make the employee redundant. Teh recalled the case of OAMPS Gault Armstrong, in which two marine insurance brokers were made redundant. In this case, the restraints of trade were upheld by the judge, although Teh stressed in other cases it may not be.
Key HR Takeaways
In order to help ground these restraints of trade and otherwise develop procedures to limit the risks of departing employees, organisations should take a number of steps:
Conduct a risk assessment. The risks each organisation faces will vary – even more so when one considers the different hierarchical levels of an organisation. Employers must identify where and how the risks exist within the business, then develop strategies, policies and systems to address these risks.
Develop contractual responses. A number of clauses and obligations may apply depending on your situation. This includes gardening leave clauses, fixed term and liquidated damages clauses, restraints of trade clauses, as well as confidential information and intellectual property clauses. It is important to understand the purposes and definitions of each of these clauses, and to use them appropriately.
It is important for contracts to be up-to-date, as well. As an employer moves throughout the organisation, their old contract may not reflect the current climate, function of the laws, or even the nature of the employment.
Consider remuneration strategies. This may feed into reasons for why employees may leave organisations. Employers should consider discretionary or deferred payments, as well as retention bonuses. Other options may also be suitable depending on the nature of the organisation. Employers must analyse how remuneration can support retention.
Develop policies and procedures. Organisations may consider limiting the areas in which information can be stored, and whether it can be transmitted (such as by email) by staff. This can help prevent defecting employees from taking information and property with them. However, this can also cripple an organisation’s ability to function in the digital world, and so these policies must not become too restrictive. Confidentiality and resignation procedures need to also be considered, and are perhaps more adequate at preventing leaks as they do not hamper the functions of the organisation. Although the former may not stop employees from physically leaking information, it may deter them as they have contractually agreed not to.
Consider other scenarios. Contractors may also pose a risk to the organisation, as may group structures, corporate transactions and joint ventures. These are functions and elements that will effect different organisations in varying degrees and need to be considered.