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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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”.

 

Tips for Employers: getting your own way and how to stop making stupid mistakes

WynLewis

Varying a contract of employment should be one of the simplest tasks.  Apparently it isn’t.  It seems that there’s no limit to the number of ways to get it wrong.

Hot on the heels of my last comment on this topic in Wess v. Science Museum Group – where the employer got it right – are three more cases that focus on the same topic, but where employers seem to have ignored their basic contract law and public sector employers have wasted public funds by having their decisions proved wrong:

In Sparks v. Dept for Transport the DfT introduced a new trigger for the number of absences that sparked an official absence management process.  But the court found that the current trigger was incorporated into the employees’ contracts of employment (i.e. it wasn’t in a variable policy) so the DfT could only make changes if that change was not detrimental.  In fact the new figure would have been detrimental to the employees, so the old trigger was reinstated.

In Norman v. National Audit Office the NAO reduced paid sick leave and privilege leave by relying on a general flexibility clause and on the words “They are subject to amendment”.  The Tribunal agreed that the NAO could do this, because there had been extensive negotiations before the changes had been made.  But the EAT disagreed and said the words weren’t precise enough to cover the methodology for making any change that was then notified to employees.

In Hart v St Mary’s School (Colchester) Ltd  the school imposed a change to Ms Hart’s working hours that required her to spread her hours over 5 days, not 3 days.  This was done by relying on a contractual provision that required staff to work at such times as necessary for the proper performance of their duties and that working hours of part time staff were “subject to variation, depending upon the requirements of the school timetable”.  But neither of these provisions worked, and the EAT found that the school had breached Ms Hart’s contract.

So in each of these three cases, the employer lost; and should have known better.  Was this due to being inept?  Was the change a calculated try-on?  We’ll never know. But what we do know is this: 

  1. Employers who state in an employment contract that terms in a staff handbook are part of the employment contract should clarify which terms are intended to be contractual and which are not.  Generally it’s better to use a completely non-contractual staff handbook, which will be easier to vary;
  2. Employers will find it difficult to rely on a general right to vary clause; and
  3. General flexibility clauses tend to be used only to make minor administrative changes, or to vary contractual provisions with which the employer is required to comply.

When will these lessons be learned?  When will public sector employers not waste public money by having their decisions proved wrong in the tribunal system? The answer is easy:  if you want to avoid getting it wrong, come to us at Golden Leaver; we know what we’re doing.

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

Will the Government’s changes to TUPE make a difference for businesses?

CarolineLeaver

At the time of giving my talk, there was a hope that changes would be proposed to TUPE to make it more flexible and commercial, in particular to enable an employer, taking on new employees following a transfer, to harmonise the terms and conditions which pre-2014 changes, was not permitted. Fast forward to 2014 and The Transfer of Undertakings (Protection of Employment) (TUPE) Regulations 2013 will come into force on 31st January 2014. But will the changes make a difference? Will our expectations be met or not?

Set out below are thoughts on some of the new provisions and their actual impact.

Variations: the new regulations do amend the restrictions on varying terms and conditions and the Government considers that they will give transferees (the new employers) more flexibility to vary transferring employees’ terms. But do they?

For TUPE transfers taking place on or after 31st January 2014, contractual variations to employees’ terms and conditions will be permitted if the reason for the variation (a) is an economic, technical or organisational reason (ETO), or (b) is the transfer, but the terms of the contract permit the employer to make such a variation. If the changes do not fit into either (a) or (b) and are by reason of the transfer itself, then those changes will be void.

A new test will be applied, so current case law is unlikely to be much help, but the Government will be releasing much needed guidance on this.

Under part (b) of the new regulations a transferee can unilaterally vary a contract of employment, provided the contract allows it (for example, a mobility clause in the existing contract). This would not really be a variation, but a change made pursuant to the existing contract. It will be interesting to see how this will be interpreted by the Courts in light of existing case UK law, where a transferee was entitled to rely on a transferred employee’s mobility clause to move their place of work, but only in relation to the old employer’s geographical location, which was different to the transferee’s. This was because the clause must be construed in view of the facts and circumstances at the time the contract was entered into.

So this change may not be as helpful as the one wanted or even wished for. Although the mobility point may not be such an issue because of the changes to the ETO defence (set out below) there are other changes that businesses wish to make post-transfer which may not come under the new provisions and so will still be void (for example, post-termination restrictions). It is not unusual for a transferree company to wish to tie transferring employees into new restrictions which protect the new employer’s clients and not just the clients of the business which transferred. These changes pre-2014 were void and it seems unless there is a clause in the contract which expressly allows an employer post-TUPE transfer to vary the restrictions (which is unusual) then they are likely to still be void post-2014.

Change in location: currently a dismissal for a reason connected with the transfer is automatically unfair, unless for an economical technical and organisational reason entailing a change in the workforce (ETO reason). The ‘change in workforce’ requirement is viewed as a change in job functions or numbers and does not cover mere change of location. The new regulations retain the ETO defence, but extend it to include changes to workplace location which will be more in line with the redundancy definition. If a workplace location is changed that can be a dismissal for reason of redundancy. Therefore, under the new regulations if on transfer an employee’s place of work is changed (which is a usual occurrence on a TUPE transfer) which results in a dismissal for the reason of redundancy this would not be an automatic unfair dismissal, but would still have to be implemented in a fair way.

Service provision change: TUPE applies to service provider changes i.e. contracting out, contracting in or retendering exercises and is commonly seen where a business wishes to do something such as outsource its IT function or change its cleaning staff. Under the new regulations, for a service provision change to come under TUPE, the activities carried on after the change must be ‘fundamentally or essentially the same’ as those carried on before. This may mean that an incoming provider who offers their services in a novel or innovative way may not be caught by TUPE. But the reality is that this will make little difference to businesses; after all, how innovative can you be in providing cleaning services?

Employee Liability Information: the time for supplying this will be extended from 14 days to 28 days. This is generally seen as a positive step as the 14 day window gave little time for the transferee (new employer) to prepare for the transfer. The Government have also retained some flexibility here by keeping the ‘special circumstances’ exemption (i.e. that if special circumstances mean it is not reasonably practicable to comply, then the information must be given as soon as reasonably practicable thereafter)

Consultation – micro businesses: businesses with 10 or fewer employees can inform and consult with employees directly. The need to elect employee representatives will not be necessary where there is no recognised trade union or any existing employee representatives. This may make little difference in practice, as many smaller businesses tend to inform and consult directly with employees anyway even though pre-2014 this was a technical breach of TUPE. The reason was that it felt more natural to discuss what could be substantial changes to an employee directly with them and an employee would respond better to the personal touch. The difference now is that companies will have the reassurance that they will not be exposed to a protected award claim if they act in this way.

Consultation – collective redundancies: currently if a business proposes to dismiss as redundant 20 or more employees within a period of 90 days or less, they must consult with representatives of those employees affected by the redundancies. In the past where there has been a TUPE transfer prior to the redundancies, pre-transfer consultation has taken place, but it was not clear whether this would comply with the collective redundancy rules. The new regulations allow for the transferee to begin pre-transfer consultation, provided that both the transferor and transferee agree and consultation is meaningful.

The new regulations seem to legitimise some practices which already happen, but with a few more interesting changes. We would have wanted to see more dramatic changes allowing businesses to harmonise the terms and conditions of employees, which is regularly an issue.

So, have our expectations on changes to TUPE been met? Not really, but this is a start.

Employment contracts – a brave new world

WynLewis

The Government has announced plans for a new kind of employment contract.  It’s called an Employee-owner Contract.  It’s a novel idea that’s intended to apply from April 2013, but may take some getting used to.

The Government will begin consultation on the idea later this month and it will be interesting to see the consequences.  In the meantime, this is how it’s intended to work:

  • employees sacrifice some valuable rights: the right to unfair dismissal, to statutory redundancy pay and to request flexible working and time off for training;
  • employees commit to giving 16 weeks’ notice of a date of return from maternity leave, instead of the usual 8 weeks,

but the quid pro quo of these sacrifices and commitment is that:

  • employees benefit from getting something that is potentially (much) more valuable than what they have sacrificed: between £2k and £50k of shares in their employer;
  • employees benefit further by not having to pay capital gains tax on any gain they make when the shares are sold; and
  • employees still retain the protection given under the Equality Act 2010, as well as (probably) the protections that gives rise to automatically unfair dismissal.

In doing this, employees will become Employee-owners.

There, are, however, several issues that will have to be addressed before people will feel comfortable about employee-ownership.  Here are a few of them:

  • Discrimination:  the allocation of shares will have to be done in a way that avoids unlawful discrimination.  Will that be done by linking the value of shares allocated and someone’s salary, or the importance of the role?  How will it affect part time staff?
  • Funding: will the shares have to be bought, or will they just be allocated? If the shares are bought, where will the money come from?  If the shares are gifted, won’t the employee have to pay tax on the benefit of getting something for nothing?
  • Control:  will Employee-owner shares have limited voting rights over a company than ordinary shares?  Will the dividend arrangements be different?  If so, will they be a cheap way of limiting an employer’s exposure to employment liability on termination?
  • Leaving:  what will happen to the shares when someone leaves their employment?  Will the employer have to buy them back and, if so, at what price; or will the shares just be forfeited if they have not been held for (say) more than a specified period?  Will there by good leaver / bad leaver provisions to consider?
  • Motivation:  employers will be able to limit Employee-owner contracts to new starters.  If they do, will there be a two tier workforce with inherent age discrimination?  If they don’t, will existing shareholders’ holdings be diluted?

The aim, of course, is to boost employee participation, productivity and commitment.  But if the aim is to target smaller, entrepreneurial businesses, it may be that their financial and administrative resources – which at SME and micro stage are often stretched to the limit already – may not stretch this far.

The detailed proposals will give an idea whether this proposal will follow the same path to oblivion as the Protected Conversation.  We shall have to wait for the devil in the detail.