Legal

How should companies handle senior exits?

12 Jun 2018 By Caron Gosling

With Sir Martin Sorrell setting up a business likely to compete with his former employer, Caron Gosling examines how firms can protect themselves from the departure of a key employee

News of Sir Martin Sorrell’s new venture, S4 Capital, has been a revelation in the advertising world. But it is also important for those considering the issue of senior exits. It is common knowledge that Sorrell was not bound by any ‘non-compete’ clause that would prevent him from working for a competitor, but less clear whether he is prevented from leveraging the business contacts he made during his 33-year reign at WPP.  

And perhaps, therein lies the rub. Even with carefully crafted and specifically tailored agreed restrictions, there is a limit to what these can achieve, for two reasons.  

First, it is not simply a case of putting these restrictions into a service agreement (or even a settlement agreement), getting them agreed by the employee and congratulating yourself on a job well done. The law jealously guards the right of an employee to ply his trade, and only in limited cases will it allow post-termination restrictions to limit the employee’s future activities, even if these have been agreed by the individual in question. 

There is no protection from competition as such, only competition that is deemed to be ‘unfair’ – and what is unfair will depend on the context. As any lawyer will tell you, it is just not possible to draft restrictions that are guaranteed to be watertight.

Second, in a digital age, the line between business and personal contacts is somewhat blurred. It is by no means straightforward for the employer to assert ownership of contacts held personally. Sorrell’s contacts are clearly extensive: is it even possible to determine when they are business or personal? Even with carefully considered restrictions, WPP may not have been able to protect itself fully from the possibility of competition from a well-connected and committed former employee.  

Protecting a business’s interests

So what can you do to put the business in the best position to protect its interests if a key employee leaves? The clear starting point is to include some restrictions within the contract of employment: better still if those restrictions are bespoke and relate to the seniority of the employee, the nature of his or her role and the nature of the business sector. 

Take a step back and identify just how this particular individual could harm the business if they leave. This should be the underlying basis of the restrictions. Bear in mind that the more limiting the restriction, the more difficult it will be to enforce. 

So while it may be tempting to include lengthy and wide-ranging non-competition clauses, this may be counterproductive – the courts are likely to take one look and strike them out as unenforceable. The key is to find the balance of interests between the exiting employee and the business that he or she leaves behind.   

In an ideal world, any agreed restrictions should also be kept under review to ensure they are still fit for purpose, particularly if the employee is promoted or given a significant pay rise. All too often we see clauses that were agreed when the employee was hired some years ago that do not reflect his or her current position in the business and so provide no meaningful protection.   

Employers often do not fully consider the ramifications of the loss of a key employee in terms of business protection. One thing is certain: as Sorrell goes on to what he calls ‘back to the future’, WPP is perhaps wishing it could go back to the past and include a non-compete clause in hiss contract. 

Caron Gosling is a special counsel at Pillsbury

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