Author Archives: JonathanGolden

Can you put a price on love?

JonathanGolden

 

Should you be entitled to damages when no loss has been suffered?

Sometimes an employee has clients who give their work to an employer only because a particular employee works there, and the employer will lose those clients’ custom once the employee leaves.

Sometimes that employee has post-termination restrictions that prevent them from still dealing with those loyal clients after leaving, but they continue to deal with them anyway.

Strictly speaking, the employer has suffered no loss (because the clients would have gone anyway) but there has still been a breach of contract by the employee.

The idea of Wrotham Park damages is to address that situation: where an employee breaches their restrictive covenants, but the employer suffers no loss because of this.

The problem is that this situation is, essentially, a licence to kill (or at least a licence to breach a contract) that sits uncomfortably with upholding a contract and the principle of fair play.

The Supreme Court decided that Spring 2018 was the right time to return to this thorny issue, known as Wrotham Park damages.

In Wrotham Park, the principle of a “hypothetical bargain” or “licence fee” damages was introduced, by which the courts awarded damages based on the price the employee would have negotiated to be released from their restrictions.

This unrealistic and hypothetical after-the-event situation made commercial sense, but was untested and seemed to break the principle that you have to suffer a loss before getting damages.

Recently the Supreme Court, having reviewed this carefully, came to the conclusion that, generally, an employer can only claim for their financial loss.

The Supreme Court was also not prepared to move away from the idea that identifying the value of the loss is essential to an award of damages for breach of contract, but that if the breach by the employee can be shown to damage a valuable asset, or if a protected right is infringed, then “negotiating damages” can be used (an esoteric concept and one that’s likely to be limited to intellectual property and confidentiality rights being infringed by the departing employee).

As a result, an employer will either have to show loss of business or goodwill (which may be impossible) or seek damages based on the gain made by the departing employee by breaching their contract (restitutionary damages – another esoteric concept in employment law).

This leads us to questioning the price of love.

The reason is that, for the moment, an employee with a very loyal personal following can breach their restrictions and can still come out of the situation smelling of roses.

The solution for the employer is commercially romantic, rather than legal:   never allow any one person in your organisation to own the client – companies must ensure that their key clients are looked after by a team of staff interacting with the client at various levels within the organisation; and make your clients love your organisation, not individuals.

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“Mum’s the word…”

JonathanGolden

 

Silent Witness is a TV show where key characters actively search for forensic evidence.  But don’t take this approach in an Employment Tribunal!

I was recently part way through a case where one of my witnesses thought it might be a good idea to find some extra evidence overnight to assist the Judge.  He knew he wasn’t supposed to discuss the case with us or the other witnesses, but didn’t think that he also had to keep mum generally while under oath.  The other side found out what happened and, the next day, the witness received a royal rebuke from the Judge, who made it clear that, when giving evidence, a witness must not speak to anyone about a case.

This particular judge was benign by giving only a warning.  It could have been worse:  claims by a Ms. Chidzoy against the BBC for whistleblowing and sex discrimination were struck out entirely when it was found out she had discussed her case with a journalist during a break while  still giving evidence. The Employment Tribunal weren’t interested in what had been discussed; it was the mere fact that she had discussed her case was enough for it to conclude that her conduct was unreasonable.  And that was the end of that.

This is part of the wider issue that, when under oath, witnesses must do what a court or tribunal orders, and answer truthfully any questions put to them.  Not doing this is contempt of court.  In fact it was reported recently that a Mr. Atwal, a DJ from Birmingham, who had claimed that his career had been destroyed by medical treatment in 2008 and wanted damages of £837,109 for loss of future earnings and the need for care, was lying, as his music videos showed.  Having done so, he is now facing a possible 2 year jail sentence.  Another case in 2016 related to a juror who did some online research about a defendant and shared the results not evidence before the court) with other jury members, resulting in the case being abandoned; he was sentenced to 9 months’ jail, suspended for 12 months.

The reality is that, in any case, people have different versions of the same story.  A court or tribunal then has to decide who to believe.  There’s always a risk that a judge thinks that evidence given is a lie (i.e. contempt of court – which is itself punishable).  For this reason, judges will say they “prefer the evidence of A rather than B”, and if they feel B was being misleading, may add that they found B to an “unreliable witness”.  Elegant, but effective.

Getting back to the TV show, last minute forensics are not the way to succeed in litigation: cases are won by getting the evidence right long before going to court or tribunal, and then giving truthful evidence under oath and taking care not to speak about a case while under oath (which can make a weekend seem like a very long weekend).

Being a Silent Witness can be tough.

George Michael, Faith and Final Warnings

JonathanGolden

Have faith – final warnings are useful.

They are easily given, difficult to appeal and can be relied on.  A tribunal can’t generally look behind a final warning and if an employee with a final warning steps out of line again, even in a relatively minor way, they can legitimately be dismissed for misconduct.

But what happens if the final warning was given in bad faith?  Surely, the process is unfair?

The answer is:  yes, it is.

However it took two appeals and for the matter to come before the Court of Appeal in Way v Spectrum Property Care Ltd  for this principle to be applied.

The facts are not particularly interesting.  All we need to know is that a final written warning had been given by a lone manager looking to hide his own misdemeanour, where the final warning was, on its face, valid and Mr Way had not appealed it.  This is what happened afterwards:

–     When Mr Way was later dismissed for another case of misconduct, which on its own would not have justified his dismissal, the employer refused to accept that the earlier final warning decision was unfair.

–     The Tribunal itself also chose not to investigate the issue, because Mr Way had not appealed the decision at the time and had accepted, in his second disciplinary hearing when he was dismissed, that the employer had genuinely believed that there had been no bad faith in relation to the earlier final warning.

–     The EAT too agreed that the employer could rely on the final warning.  They said that even if the Tribunal had considered evidence which had demonstrated that the final warning was given in bad faith, the decision would have been the same because, given the particular circumstances of the case, the employer could rely on a final written warning.

There are good reasons why both tribunals did not want to look behind the final warning:  deciding whether an employer’s decision to dismiss is fair is already time consuming, but having to consider the fairness of earlier warnings adds another level of complexity and time, which the tribunal system would prefer to avoid.

But the Court of Appeal disagreed with taking shortcuts.  It said that if the final warning was needed in order to justify the dismissal, then the tribunals needed to be satisfied that the final warning was given in good faith.  If there is any doubt, then it is for the Tribunal to investigate this and make a determination.  It made no difference whether the employer, when it reviewed the decision later, thought the final warning was made in good faith.   So the case has been sent back to the Tribunal, to review both the original final warning and the later dismissal decision.

The practical (rather than legal) mistakes in this case were that Mr Way’s representative did not press the bad faith point sufficiently with the Tribunal when it first heard the case and, because the employer had no interest in pressing this point, the Tribunal did not pursue it either.  So the lessons are:

–    If you as an employer want to rely on a final warning, then make sure that you are satisfied it was given in good faith.  Don’t bury any concerns.  Deal with it.

–    If the employee challenges the final warning in tribunal but does not follow through, don’t bury the allegation.  Still deal with it.

The temptation is not to look for trouble, and ignoring things does work some of the time, but if you have a determined employee (especially if they are supported by a union), cutting corners is a false economy.

Or, as George Michael put it in his 1980s lyrics:  “Well it takes a strong man baby, But I’m showing you the door, ‘Cause I gotta have faith, faith, faith”.

The Power of “No”

JonathanGolden

In negotiating terms, “no” is possibly the most effective argument available to an employer, but as with all powerful tools, it is double edged and should be used with care.

We have noticed an increasing trend amongst employers, particularly banks, which are going through a consolidation process, to provide a fixed termination package and settlement terms.

They refuse to discuss either – regardless of the individual circumstances. It is a case of “one size fits all” and generally the size of the package is enough to encourage most affected employees to take it.

Any challenge, however reasonable, is met with a “no” and perhaps a tightening of the timescale for acceptance.

Any persistent challenge – even by a valid claimant whose circumstances demand individual consideration – is still met with a “no” because, as with insurers, the employer uses two systemic methods of dissuasion:

  1. It works on the basis that in percentage terms, very few people with good claims will want to go against the machine, and the employer will fight every case, even if they go to tribunal, just to get across the message that it will be a long and expensive process to follow a complaint through. So very few do go to hearing. Most drop out.
  2. Any discussion about the terms of a settlement document are dealt with by a very junior HR representative who has been told, on pain of death, never to agree to change any terms, and to keep religiously to a script of “this is a standard clause which we never vary”. If you push hard enough, it will go up the line, and come back – some time later, when employees are edgy – with the same answer even where the clause is clearly inappropriate or wrongly drafted. Systematic intransigence and/or incompetence is another tremendous tool.

So is this the right approach for all employers? Yes and no: it works, and so long as the package that is offered meets the statutory minimum or is modestly enhanced, pretty much everyone will accept what is on offer, and the process will have been managed cheaply by junior staff. Job done.

But treating everyone in this way tends to breed universal resentment of the organisation. And in terms of recruitment this may be damaging, as research tells us that a customer who has a good experience will typically tell 3 to 5 people, but a customer who has a poor experience will tell more than 20.

This may be apocryphal, but I get sufficient feedback from clients to know which employers are seen as having toxic employee relationships, and they are not shy of telling people what they think of their former employer. So a large employer has to balance the expediency of a one size fits all approach, and the short term financial gains this provides, against long term reputational damage when they want to recruit on the upswing.

Where the power of “no” is always counterproductive, is when a single employee is being dealt with, especially where the individual is senior and articulate or there are complicating issues.   In that situation, the “this is what you get” approach rarely works, it just inflames the situation. In fact its mirror works much better: in my view, it is vital for an employer to reach behind the politics and personalities to establish why a situation is not working, and then to explain that clearly to an employee and propose a solution. The power of persuasion, while not exactly a “yes” will almost always produce a better result than a “no”.

Treating employees as individuals and taking the care to resolve a matter firmly but fairly is not a selfless act, it stops things getting polarised, and costs less than a dispute – both in management time and fees. The departing employee is hardly likely to be a cheerleader for their former employer, but equally it may result in them adhering to their confidentiality provisions and stop them from denigrating that former employer in the market.

In my experience, in the long term, the power of persuasion will always beat the power of “no”.

 

Shoot The Messenger?

JonathanGolden

Employers aren’t liable for insurance benefits which discriminate against certain employees, especially where there are no alternative insurance products in the market, so long as (and here’s the sting in the tail) they’ve explored what’s available in that market in the first place.

The case of Hall v Xerox UK Ltd, decided by the EAT, emphasises the need for employers to audit their contracts to make sure they are not responsible to employees for the 3rd party insurance benefits they offer, and also to take steps to check that the benefits they offer are in line with the market.  For this reason we offer an audit service, and strongly recommend that employers check their arrangements at least every 3 years.

Facts:  This case looked at a situation where a fixed-term worker (Mr Hall) was unable to have permanent health cover (otherwise known as income protection cover) because under the insurance policy provided by Unum, he was disqualified for cover, because his contract came to an end before the 26 week qualifying period expired.  Had Mr Hall been a permanent employee, he would have qualified for cover, as his illness lasted for longer than 26 weeks.

Question (1):  It was accepted that Mr Hall had suffered a detriment because of his fixed-term status and the question was whether Xerox was responsible for this unfavourable treatment of Mr Hall under the Fix-term Employees (Prevention of Less Favourable Treatment) Regulations 2002.  The EAT confirmed that Xerox wasn’t Unum’s agent and so could not be liable for Unum’s discrimination.  Instead, the cause of the problem was Unum in refusing cover.

Question (2):  However, Mr Hall also argued that Xerox should have found a better policy which would have covered fix-term employees in the same way as permanent staff.  The EAT disagreed, because Xerox had no choice: its evidence was that there were no policies in the market which cover fixed-term employees in the same way as permanent staff.  However the EAT also said that if there had been suitable policies available in the market for fixed-term employees, and Xerox had chosen not to offer one, then Xerox (not the insurer) would have caused the problem by choosing cover which discriminated, and would then have been liable unless it could have justified its choice.  Unfortunately, the EAT decided not to consider whether the additional cost of a non-discriminatory policy would have justified such a choice, because in this case, there were no other policies available – although (for a company with the size, resources and bargaining power of Xerox) the cost differential ought to be minimal.

Comment:  This emphasises another point which (fortunately for Xerox) did not come up in this case:  some employment contracts (especially older ones) are drafted so that the employer contracts directly with the employee to provide the employee with the benefit, and if the insurance policy that the employer takes out to back up its contractual obligation does not match that contractual obligation, then the employer has to meet any shortfall.  If that situation had arisen here, Xerox would have been responsible for paying (say) 75% of Mr Hall’s salary (or whatever was the level of reduced salary payable by Unum as insurer) until he was able to work again or retired – potentially ruinously expensive if repeated for several people on PHI.

Lessons:  Overall this case emphasises that an employer is not liable where a 3rd party benefit or policy discriminates, but only if:

  1. Its contracts are drawn up properly, and
  2. It has researched the market to check that it can’t purchase a policy which is not discriminatory.


 

A helpful reminder to check your arrangements, or sign up for our audit service and ask us to do so on your behalf.

Can a court rewrite a non-compete restriction in favour of an employer?

JonathanGolden

The answer should be ‘No’, but in the case of Prophet v Huggett, the court did exactly that.

This is a case where the enforceability of a non-competition restriction was challenged because of a mistake in the drafting.  The employer produced its own bespoke software and the restriction stopped the employee from working with a competitor “in connection with any products in, or on, which he/she was involved whilst employed”.   As no competitor could sell the employer’s own software, the non-compete clause made no sense, and the employee argued, was unenforceable.

Normally the case would fail at that point, because of two well known principles:

  • a court cannot rewrite a covenant to make it enforceable because it is too broad, and
  • if there are two alternative readings of a clause, the court should use the reading of the clause which would be more enforceable.

In this case the court agreed that the clause made no sense, but felt it would do if it added the words “or similar thereto” to the restriction.  The judge argued that the court is able to read a clause with “business common sense” in preference to a strict or literal interpretation.  In his view, it was clear on the face of the contract what had been intended, and it was a simple drafting error which could be remedied.  This was not a rewriting of a clause which was too broad or had a different possible reading, it was just wrong.

There are a number of other features of this case, including bad behaviour on both sides, which remarkably the court was prepared to forgive when granting an injunction on the reworded clause.  The normal principle is that a party (here the employer), looking for an injunction should “come to equity with clean hands”.  In other words the court would not normally step in to assist a party who has not behaved well.  However, the employee had behaved far worse, and the court had no sympathy for him.

The case highlights that courts are increasingly prepared to enforce a restriction which stops an employee joining a competitor at all when it believes that confidential information and client contacts cannot be adequately protected by non-solicitation and non-dealing clauses.

This is a case decided by a Deputy High Court Judge which might have been appealed and is fact- sensitive, and should not be relied upon by employers who behave badly toward an employee and don’t have effective restrictions in their contracts. That said, it demonstrates two things:

  • If a genuine and obvious drafting mistake is made, a court can step in and give the clause commercial sense by adding words, as long as the other rules of interpretation are still adhered to.  This is rare.
  • Courts recognise that often the only way in which a company can protect itself is by keeping departing employees out of its markets altogether through a non-compete restriction for up to a year.

Prophet PLC v Huggett (11 March 2014) – http://www.bailii.org/ew/cases/EWHC/Ch/2014/615.html

For further background information on this topic, see our briefing note on Restrictive Covenants and Garden Leave – http://goldenleaver.co.uk/wp-content/uploads/Restrictive-Covenants-and-Garden-Leave-Briefing.pdf

Can a small employer use an independent panel on an internal appeal, and ignore their decision? The answer is sometimes.

JonathanGolden

Often a small employer faces the dilemma that having investigated an issue of misconduct and carried out a disciplinary hearing, there is no senior manager who was not previously involved in the case available to deal with any appeal. The employer will be concerned that a dismissal will be unfair if it cannot provide an independent appeal process. Equally, the employer is loath to lose control of the process and have someone outside the organisation hear the appeal when they do not understand the culture and standards of the employer and the personalities involved.

The employer’s worst nightmare is to find its decision to dismiss overturned by a third party. This is what had happened in a recent Employment Appeal Court (EAT) case, in which the Tribunal allowed the employer’s decision to ignore the successful appeal and proceed to a dismissal. The dismissal was nonetheless fair in all the circumstances which included:

  1. The employer is a nursery whose first concern was for the children in its care.
  2. The appeal panel were only asked to review the decision made, and did not have authority to bind the nursery with its decisions.
  3. Further information came to light as a result of the appeal process which was later investigated.

In the particular circumstances, it was not unreasonable for the nursery not to follow the decision of the review panel, and the failure to do so did not of itself render the process unfair. In fact the EAT helpfully confirmed that the nursery would not necessarily have been in breach of the Acas Code if the nursery had decided that it should deal with the appeal internally even without an independent manager. A judge always has to take into account the size and resources of the employer, and cannot just say that a failure to set up an independent appeal, or follow a third party assessment necessarily makes a decision to dismiss unfair.

This a triumph for common sense and allows for each case to be decided on its own facts, but it is by no means safe to ignore an appeal panel, or proceed with an appeal internally where there is likely to be bias (whether actual or perceived). The point is that tick box law may well not produce the right outcome and if a small employer has real concerns about the appeal being dealt with externally, there are often good reasons for this, and if properly articulated the reasons may well be accepted by a tribunal as being valid and reasonable.

Kisoka v Ratnpinyotip (t/a Rydevale Day Nursery) (Unfair Dismissal : Reasonableness of dismissal) [2013] UKEAT/0311/13 (11 December 2013)

Employment Tribunal statistics: the introduction of fees in tribunals is resulting in a staggering reduction of claims. Is it all good news?

JonathanGolden

Many of us predicted that the introduction of fees in July 2013 for claims in Employment Tribunals would reduce the number of claims being brought. However, none of us anticipated a staggering 79% drop in the number of applications lodged in the last quarter of 2013 (compared with the same period in 2012).

Is it good news for employers? Generally it is because troublesome claimants with weak claims who were clogging up the system and wasting management time and cost seem, for the moment at least, to be a thing of the past. However, there is a sting in the tail because successful claimants can generally expect to recover their fees from employers, and the Employment Appeal Tribunal has recently confirmed that this applies to appeals as well. And as from 6 April 2014, tribunals will also be able to impose financial penalties on employers where it is decided that an employer has acted unreasonably, for example where there has been malice or negligence involved in an employee’s treatment. Penalties will be 50% of the award made to a claimant and subject to a cap of £5,000.

Is it good news for employees? Not really because any penalty awarded goes to the government’s Consolidated Fund and not to them.

Is the new system serving the interests of justice? The government would say it is because it is increasingly taking a utilitarian view of access to justice, namely that a tribunal system which is not bogged down with bad claims and pays for itself must be good for the majority of legitimate claimants because it produces an efficient and sustainable system of justice.

We, and most employment lawyers, feel instead that it is a travesty because the tribunal system no longer serves the people it was set up to protect; individual justice has been lost. True enough, many of the time wasters will be among the 79% of claims not brought, but so too are the majority of the bread and butter claims by employees who have not been paid their salary or who have been summarily dismissed without justification.

Even without being a cynic, it is easy to see that the tribunal system no longer serves the majority of its constituency: for those who can actually afford to pay lawyers (a shrinking minority), the new cap of £76,574 as from April 2014 on normal awards and the inability to recover costs (rather than tribunal fees) even if successful make most claims uneconomic. For the low paid, the lack of a costs regime puts them in the hands of ‘no win, no fee’ lawyers who need a quick solution in order to make claims pay, and who are reluctant to front any fees. The government and employers are happy, as they can report that claims are reducing as are the costs of a bloated system.

I feel that the balance is wrong and there is likely to be a market solution found with both employers and employees having to insure themselves against the possibility of claims, and the insurers acting as gatekeepers, only allowing legitimate claims with good prospects of success to proceed and managing the costs in any claim or defence they support.

Social media and restrictive covenants: Death by a thousand cuts?

JonathanGolden

Do the easy relationships and information available through social media limit an employer’s ability to enforce restrictive covenants? The good news for employers is that a recent High Court decision says that they do not.

The case relates to a recruitment agency which supplies teachers and is therefore of particular interest to the schools and recruitment agencies we represent, but the case has much broader application.

The judge held that non-solicitation (i.e. not poaching customers or staff) and non-dealing (i.e. not having any business contact with clients) restrictive covenants in the employment contract of a recruitment consultant were enforceable.

The reason was that the employer still had a legitimate interest to protect, despite the fact that recruitment information was widely available on social media.

Employment agencies can therefore take comfort from the fact that the wide availability of recruitment information on social media did not weaken the employer’s legitimate proprietary interest – in this case. The court also seemed to recognise that the fragility of customer loyalty makes it all the more vital for the employer to enjoy protection – in this case.

A number of practical points were made in this case:

  1. Neither schools nor teachers have loyalties to particular agencies (each register with several) and information about teachers is no longer confidential as it is freely available on the internet.
  2. Any loyalty which exists tends to be with an agency rather than an individual within the agency. However, that individual relationship (even with a junior employee) may be the deciding factor in an agency being used in preference to others.
  3. A restriction of 6 months stopping an employee dealing with any schools and candidates they had been involved with in the previous year was reasonable, even though this was a fast moving market and confidentiality was not a significant issue.
  4. The fact that relationships within the sector are fragile, made the need for protection, and any restrictions, more rather than less relevant.

A few technical points also came out of the case:

  1. As a result of threatening letters, the ex-employee had been forced to offer an undertaking not to deal with clients, but doing so in the face of the threat of litigation was not an admission by the employee that the restrictions are effective.
  2. The restrictions used the standard wording of the Recruitment & Employment Confederation – some of which were unenforceable as drafted – and the judgement confirmed that the courts can delete words to make a clause effective.
  3. We as lawyers are always trying to anticipate all eventualities, but care must be taken to make sure that provisions against competing, soliciting and dealing with customers cannot be triggered just because an ex-employee takes a minority stake in a competitor, as this could invalidate the restriction.

Conclusion: This is a helpful reminder that, although many things have changed in the way people now do business and in the collaborative and sharing nature of business relationships, with the use of LinkedIn and other social media, employers can still expect a sympathetic response from the courts if they have reasonable and well drafted restrictions in their contracts.

Here is a link to the actual case: http://www.bailii.org/ew/cases/EWHC/QB/2013/4138.html

Not so rosy in the garden

JonathanGolden

I am often asked by senior executives to explain how the law allows an ex-employer to stop them approaching or dealing with clients they have known for many years, or, in some cases, from working within the same sector at all.   To make matters worse, they are not even paid for some of the period they are kept out the market.

Surely it is a restraint on trade, and unenforceable?

The answer is that well drawn garden leave clauses and post-termination restrictive covenants are enforceable where they are there to protect an ex-employer’s legitimate business interests.

Is this fair?  It depends on which side of the fence you are sitting.

For example:  as consumers we do not have a big issue with companies taking out patents to protect the enormous investment they put into research and development to produce products we like using.  In fact we would find it strange if employees and competitors could just take this type of intellectual property for themselves.

Similarly:  in my view we should not find it strange that a business wants to stop you from setting up in competition around the corner and trying to taking its key clients, at least for a period of a few months.  The fairness is addressed in the balance of the restrictions: they should not restrain individuals beyond what is absolutely necessary for the business.

We have produced a briefing note which discusses this balance and some of the issues surrounding these clauses:

http://www.goldenleaver.co.uk/nl-focus/Restrictive%20Covenants%20and%20Garden%20Leave%20Briefing.pdf

It is something that both employers and individuals should give careful thought to when negotiating and updating their employment contracts.