Is there a future for non-compete clauses?

Hot on the heels of the US Federal Trade Commission’s (“FTC”) proposal for a complete ban on non-competes, the UK Government has announced its intention to limit post termination non-compete clauses to just three months. This comes as part of a wider announcement of proposals which the government says have been made to help boost the economy, in this case by promoting competition and productivity in the workplace.

When will this happen?

It’s unclear at the moment when this restriction will come into force. Any reform to the rules on non-complete clauses will require primary legislation, which the government’s press release states it will be done “when parliamentary time allows”, so when that will be is anyone’s guess.

What’s the impact of this change?

At first glance, this will cause alarm for many employers, particularly those in recruitment or sales where the exposure of former employees joining a competitor or setting up in competition is a real concern. However, there’s long been criticism in the courts for non-compete clauses with judges seeing them as unreasonable restraint of trade, particularly where there are non-dealing and non-solicitation clauses which can arguably offer sufficient protections to a business’ legitimate interests, without there being a total ban on competition.

What we do know is that the government have confirmed that limiting non-compete clauses will not affect restrictions during garden leave or paid notice periods (the proposal relates to post-termination only), or change the position on confidentiality clauses or non-solicitation clauses (which prevent employees from contacting previous customers, clients or suppliers in an attempt to win their business).

However, amongst other things, the government’s press release was silent on:

  • non-dealing clauses (which sit somewhere between non-solicitation and non-compete clauses and are generally, therefore, easier to enforce than non-compete clauses); and
  • whether the proposals will have retrospective effect (it’s likely that they will so an employee who spends 3 months of garden leave would likely not be restricted after the end of their employment, regardless of whether the restriction is longer).

What should employers do now?

Until the proposal becomes law, there’s no legal requirement to amend any existing restrictions, however employers that currently have restrictions beyond 3 months, or who are considering introducing them, should think carefully about whether these are likely to be enforceable now, and in the future.

Restrictive covenants are a complicated area and for the best chance of them being enforceable, they should be regularly reviewed. This is particularly important because the courts will only consider whether a restriction is enforceable at the time it’s entered into, not at the time the employer seeks to enforce them (by which time the employee/former employee may have a far more senior position, making the restrictions even more important).

For advice and assistance with drafting enforceable restrictive covenants, contact the Employment Team at Sherrards.

Sherrards Recruitment team help client with breach of restrictive covenant battle

The team issued High Court proceedings with an injunction hearing which was successful.

Barney Laurence and his team were able to secure default judgment avoiding significant expenditure for ongoing legal proceedings for our client which they would have stood little to no prospects of recovering from the former employee.

Sherrards help London based recruitment agency recover unpaid fees

The matter proceeded to a final hearing and after some 18 months of litigation a Judgment was given in our client’s favour, resulting in them recovering not only the recruitment fee but also statutory compensation and contractual interest.

The team also resolved an important ‘passing off’ issue for the same client following a competitor setting up a recruitment company with a very similar name.  The competitor was forced to change its name, website and materials within a week of our involvement. 

The client was referred to the Recruitment team by their Recruitment Directors Lunch Club (RDLC) networking group. The successful outcome of this matter has been widely publicised via the RDLC network, resulting in further instructions and recognition from the group.

To find out about more successful cases, please contact Barney Laurence

Back-dooring: An overview for recruiters

Back-dooring: As the pandemic continues to suffocate the economy, recruiters are facing an even tougher time when it comes to collecting payment of fees. Clients are exploiting any and every possible way to avoid having to part with money and the classic “back door” scenario is something that seems to be cropping up more than ever.

In simple terms, back-dooring is where a client takes on a candidate without accounting to the recruiter for its fee. It is more often than not accompanied by associated arguments that the candidate came to the client via another channel, independent of the recruiter. This tends to arise in permanent recruitment, but it does also arise in relation to contractors and candidates being taken on by third parties. For the purposes of this note we shall assume we are dealing with permanent recruitment but often the same principles apply to all forms of ‘back-dooring’.

Understandably, recruiters take huge exception to this practice. Often rightly so. Usually (although it’s fair to say not always – more on this later) the recruiter has committed significant time, effort and resources to finding the right candidate so why should the client reap the benefits of those efforts without having to pay? We have noticed a sharp rise in back-dooring cases in recent weeks, and it is clear that in many cases this is just an argument being deployed in the hope of negotiating a lower fee, but there are some cases that are more involved and which can lead to drawn-out, often costly, arguments and even litigation.

So what’s the deal?

It’s actually quite simple. There’s no “law of back-dooring”. It is a question of what you are contractually entitled to, whether that entitlement has arisen and, critically in the vast majority of cases, whether you were the “effective cause” of the candidate getting the job. Usually, it is the application of the effective cause doctrine that is the focus of disputes and where claims fall down (we return to this below).

Each case must be analysed on its own facts. That is a vitally important point. In other words, seldom are two cases the same and every time a backdoor situation arises it’s a question of carefully investigating the full circumstances to establish whether there is a basis for a claim.

The starting point, without exception, is to look at what the terms of the contract say (it is assumed for the purposes of this article that a contract has come into existence – contract formation is a topic in its own right and a complicated one at that). Most recruiters’ terms and conditions are in standard form, covering the essential bases: they deal with an introduction leading to an engagement, with the fee liability arising on “Engagement”. Always check the definitions: Usually there’s little argument as to whether there’s been an “Introduction”, but key in our experience is how “Engagement” is defined: sometimes it means acceptance of an offer, sometimes it’s on the candidate and client signing a contract, sometimes it’s when the candidate actually commences work.

Next, have those events been triggered? This is where the paper trail becomes so critically important. You will need to be able to produce good evidence that you introduced the candidate to the client; that you did so with the candidate’s consent and, importantly, that it was you and your efforts that led to the candidate being taken on. In the vast majority of cases – in our experience – the paper trail is there in the form of emails, text messages, WhatsApps, CRM-entries, and so forth. A good recruiter will have solid evidence of the dealings with the candidate and the client from the get-go; through interviews, salary negotiation, starting dates. Everything. If you don’t have this, or if there are gaps, they could be fatal. If all the ingredients are there, you can get your claim moving (what that entails is a topic for another day).

What commonly comes back from the client in response to the claim is that someone else introduced the candidate; often another recruiter, but we have seen it a lot in recent weeks and months where it is claimed that the candidate was introduced following an internal referral. In practice, it is impossible to evaluate the strength of the recruiter’s claim until these arguments are bottomed-out. That means your lawyer pressing the client very firmly not only for full details – who the alleged third party or internal referrer is, when they came on the scene, and so forth – but, critically, for disclosure of all documentation underlying those claims.

This is your opportunity to corner the non-paying client. A well-targeted, well-drafted claim for disclosure can be make or break. It is the key to the back door, so to speak. It is designed to flush-out the claim that some third party was responsible for the candidate being taken on, not you. If it’s just a try-on, the client’s response to the disclosure request will be telling: after all, if they have the documentation to prove their case, you would expect them to jump to hand it over so as to get you off their back. If they don’t, they usually refuse to engage with you.

The way to apply pressure to get this documentation is for your lawyers to threaten an application to the Court and to tell the client that, if they do not cooperate, the lawyers will make sure the Judge is told about it if and when you get before the Court. For various reasons, this threat doesn’t always carry a lot of weight but it’s in reality the only tool at your disposal short of just issuing Court proceedings.

As and when the disclosure comes in, it needs to be analysed very carefully. Is there another agent involved? When were they instructed? When was the candidate engaged? Have you been given all of the relevant material? Might there be anything missing? Are there suspicious circumstances? Last year we had a case where the client got angry that our recruiter client wouldn’t reduce its fee; we then found out that, a mere few days later, another agent had been instructed and, it was claimed, introduced the same candidate to the client – it stank and using the above disclosure approach we flushed it out for what it was – a cook-up – and recovered the recruiter’s fee in full, as well as all legal costs.

Again, each case must be taken on its own facts and it is paramount to evaluate all of the circumstances. There is a world of difference between a candidate being engaged a month after an introduction, versus 11 months later: the latter lends itself to a much more tricky fee claim, even if the recruiter’s terms contain the common “12-month ownership clause” (which, by the way, does not guarantee you protection). Equally, what was the extent of the recruiter’s involvement in the introduction and engagement? A recruiter who has done no more than forward a CV can expect to face a higher degree of resistance, especially if it was then many months before the candidate was taken on and there is evidence that another agent subsequently came on the scene. Where is the candidate now? Have they moved on? Can you get a statement from them? Some careful lateral thinking can prove invaluable to getting to the bottom of what has taken place and therefore improving your position.

Effective cause then needs to be considered. This, in our experience, is what the vast majority of back door cases turn on. The legal position is, unfortunately, not entirely clear and there are few recruitment cases on it (most of the cases relate to estate agency). What we do know is that, in the vast majority of cases, in essence the law requires:

  1. That the agent is the effective cause of the candidate being engaged;
  2. That the agent need not however, be the immediate effective cause, provided that there is sufficient connection between his act and the ultimate engagement of the candidate.

What this means in practice is not so easy to pin down, which is why this area of the law is unsatisfactory and in need of clarification. Hence why we say ‘each case on its own facts’ and it is a question of carefully scrutinising all aspects of a case to work out whether effective cause can be shown. This area of the law cries out for clarification because it would enable lawyers to advise recruiters with more certainty.

It is, at the same time, not impossible for the client to be liable for two recruitment fees in respect of the placement of the candidate. We have seen that happen before so it should not be assumed that if another recruiter is on the scene only one of them will earn a fee. Both could be entitled to payment.

There’s also scope for negotiation throughout: splitting the fee with the intervening recruiter is one potential solution, galling though it tends to be but often a better way forward than the prospect of an expensive legal battle. It is fair to say that a lot of the time the purpose of engaging in hostile correspondence is to create enough doubt and concern in the client’s mind so as to make litigation risky for them and therefore to elicit a settlement offer. Back door cases very rarely see a courtroom (which probably explains the lack of reported cases) because most of the time they settle. What that settlement consists of depends on all manner of factors, probably the most critical of which is the strengths and weaknesses of the parties’ respective positions, which again is the reason why it is so fundamental to establish from the outset what those strengths and weaknesses are.

In times like these, cash flow is critical. There is an enhanced drive from recruiters to pursue fees. But it is very rare that back door claims are resolved in short order; by their very nature they tend to take a while and that inevitably means the cost of the process is correspondingly higher than might be the case in a more straightforward debt claim scenario. Nevertheless, in our experience persistence is key: you need to show no let up. What must be conveyed is that you will not go away and that cost is not going to deter you from pursuing what is owed to you. That said, the present climate also means that many simply do not have the resources to commit to drawn-out legal disputes so it may be a fight you need to defer to when life gets back to something more resembling normality. That is usually no problem: you typically have six years to pursue your claim so waiting a bit if necessary, is an option.

Back door claims are rarely straightforward and almost never get resolved overnight. They require careful focus and a commitment from the recruiter, along with the benefit of experienced legal advisors. Usually only those who persevere tend to achieve a result they are content with, and the results can be both rewarding and critical to a recruiter’s income. But think too about the reputational risks of not chasing fees when they’re properly due; can you afford to do nothing?

Contact Barney for more information.

No terms, no matter

It remains best practice that you should always incorporate your terms and conditions of business into your dealings with clients, even though it is no longer a mandatory requirement to do so since Regulation 17 of the Conduct Regulations was revoked with effect from 8th May 2016.

But sometimes it doesn’t happen. Sometimes clients ask you to help them to find a candidate and you provide that assistance, but it all happens quickly, often via exchanges of emails, and there’s never a conversation about fees and terms of business. Is all lost if the client then engages the candidate you introduced? No, it isn’t.

The answer lies in what is known as “quantum meruit”. That is a fancy latin phrase bandied around by lawyers. It means “the amount he deserves” or “as much as he has earned”. Jargon aside, it allows for you to be paid a reasonable sum of money for services rendered to your client in circumstances where you have not specifically agreed a fee. It assists you in the very circumstances described above.

We see this more and more in recruitment cases, perhaps because of the prevalence of email and the tendency for business dealings to lack formality at times.

The typical “defence” raised by the client in response to a fee claim is “we never agreed terms”, but that doesn’t get them particularly far. If you can show that the client expressly or impliedly requested or freely accepted your services, you have the makings of a quantum meruit argument and can pursue your fee irrespective of the absence of agreed terms. Otherwise the client reaps the benefit of your services without having to pay a penny piece for it and that is unjust.

How much are you entitled to? Well, the law of quantum meruit entitles you to a reasonable sum. More often than not, that is equal to the market rate that applies for the services in question: so, typically the rate you would ordinarily have agreed had you had the discussion at the outset of your dealings with the client.

Always try and expressly agree the terms and conditions and basis on which you are dealing with your clients, because that brings a significant measure of certainty. But if you do not, cannot or simply omit to, all is not lost and you still have a basis for pursuing your fee.

Contact Barney for more information.

The ‘Shot across the bows’ letter

Unless you intend to – and are in a position to – follow through with formal action, think twice before sending a warning letter to an ex-employee. So-called ‘shot across the bows’ letters are commonly sent out to warn against breaching post-termination restrictive covenants, but they invariably do little more than tip the individual off that you’re onto them, and prompt them to cover their tracks more carefully (making it harder for you as the former employer to substantiate your concerns).

They are often sent for emotional reasons or else prompted by mere suspicion (as opposed to proof) of wrongdoing, rather than on the basis of any actual evidence of unlawful behaviour. This limits the impact of the letter and can make the sender (the former employer) appear needlessly aggressive.

Of course, in some circumstances it is appropriate to send warning letters, but more often than not a former employer would do better to sit tight and wait until actual evidence of wrongdoing emerges, and send out formal pre-action correspondence at that point. That way, the letter has more clout and will be far more effective in terms of what it is intended to achieve, which is to stop unlawful conduct and “send out the message” that, as a business, you will not tolerate such activity. It will also put you in good stead in the event that you do need to follow through with Court action.

A Warning letter is not to be confused with reminder letters. Commonly, an outgoing employee will be sent a letter by the employer at or around the time of leaving, which (as well as dealing with other matters) reminds the employee of restrictive covenants in the contract of employment. This does no harm at all and is to be encouraged as a standard procedural step because it makes it much harder for an outgoing employee to claim that he or she had no recollection of any such covenants.

Contact Barney for more information.

Recruitment: Enforcing Restrictive Covenants

It is all too common to see employees of recruitment companies break the law by contacting candidates or clients after leaving and joining a rival agency. Fortunately, the law is there to protect these companies against the actions of rogue former employees by way of restrictive covenants, and in June Sherrards helped one of its long standing  recruiter clients obtain an injunction in such a case.

Our client was awarded an interim injunction against a former employee to prevent her breaching post-termination restrictive covenants and misusing confidential information, after evidence showed that the breaches had caused significant commercial damage to the company and its customer relationships.

Our client had employed the defendant as a recruitment consultant between September 2016 and June 2018. Her contract obliged her not to solicit or deal with the company’s restricted customers and candidates for six months after termination. The contract also contained post-termination provisions regarding confidential information to which she had access during her employment. The defendant resigned from the company and, shortly after, joined a competing agency, specialising in recruitment in the industrial sector (a sector our client also specialises in).

Our client then discovered that the ex employee had dealt with several of its restricted customers and candidates. It produced evidence showing that she had informed some of its candidates – who were due to start a shift for a major client – that they were no longer required to attend as the shift had been cancelled. It also showed that she had sent her new employer’s registration packs to those candidates.

Our client said the ex-employee’s conduct put this confidential information, in the form of trade secrets and business connections, at significant risk and it was therefore compelled to protect its position by seeking an injunction.

In considering whether to grant relief, the court had to apply the law as in the seminal case of American Cyanamid Co versus Ethicon. There had to be a serious issue to be tried, damages must not be an adequate remedy and the grant of the injunction had to be the most convenient option on balance.

An interim injunction would give our client a substantial part of the remedy it sought. The ex-employee was aware of the instant hearing but had chosen not to appear or to send representation.

It was emphasised before the court that damages alone would not be an adequate remedy and that, in the absence of an injunction, our client would undoubtedly suffer (and continue to suffer) serious irreparable harm. The Judge – Karen Steyn QC – agreed and granted the injunction without hesitation.

To find out more, click here to speak to Barney Laurence.

Recruitment Agency Fee Disputes

Recruitment agency fee disputes: A recent case handled by Sherrards’ recruitment specialists, Barney Laurence brought into sharp focus the importance of the client recruitment agency (“Company A”) following its own terms of business.

Company A was engaged by Company B to source a candidate for a role. Company A supplied a quality candidate, whom Company B subsequently engaged behind Company A’s back. When Company A found out that its candidate had been hired, it immediately approached Company B seeking payment of its fee pursuant to its terms and conditions. Court proceedings were issued.

Company B initially disputed that there was any contract at all, but conceded only days before the trial (well over a year later) that there was a contract and that Company A’s terms and conditions applied to that contract.

Under Company A’s terms – and as is commonplace in recruitment – its commission fee was to be a percentage based on the amount of the candidate’s “remuneration”. In the event that the actual remuneration was not known to Company A, Company A could calculate its fee based on what it deemed the remuneration to be in the circumstances, but could only do so after having first asked Company B what the remuneration was and allowing Company B a period of time to respond to the request.

Company A, therefore, enquired of the level of the candidate’s remuneration but did not receive an answer. Six days after having made the enquiry, Company A proceeded to raise an invoice based on an assumed salary and issued the invoice to Company B. Company B responded (albeit not sufficiently) thirteen days later, but by this time Company A had already issued its invoice. The problem with this was that, under Company A’s terms and conditions, Company B had fourteen days to respond as to the level of remuneration, and so an issue therefore arose as to whether Company A had “jumped the gun” in issuing its invoice without giving Company B the fourteen days provided for in Company A’s terms and conditions.

In this case, Company A’s commission was 30%. But if it could be shown that Company A had failed to comply with its own terms and conditions (by raising an invoice prematurely), Company A risked losing the right to claim its 30% fee under the contract, instead having to fall back on a claim for damages, which could well have meant Company A receiving substantially less in monetary terms than the 30% it had contracted for.

In the event, the case settled the day before trial and so the issue was not determined by the Court. Further, it was unlikely (for various reasons, not least a demonstrable lack of honesty on the part of Company B) that Company A would have lost the right to recover its contractual fee at 30%. Nevertheless, the case stands as a stark warning to recruiters that, if you fail to follow your own terms of business and the procedures, you could well find that you lose the ability to recover your contractual fee and instead have to settle for a potentially far lesser amount. So whatever your terms and conditions say, make sure you follow them to the letter.

Well-drafted, unambiguous terms and conditions, along with robust procedures, can prove to be the recruiter’s saving grace in situations where there is a dispute about fees, so it is always worth investing in having your documentation and processes reviewed by specialist recruitment lawyers. The cost of doing so will invariably be a mere fraction of what you could spend in legal fees pursuing payment from your client. Worse still, poor documentation and procedures could mean having to forego a fee altogether.

To find out more, please contact Barney Laurence