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Team moves: navigating legal complexity

Christopher Perkins of PwC considers the challenges law firms face when hiring teams and how to overcome them.

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As firms in the legal sector consider their future, research conducted by Byfield Consultancy and Fox Williams (“From Recruitment to Robots: growth strategies for law firms”) has found that the most popular growth strategy is to hire teams of people from competitors, with 71 per cent of the law firms surveyed expecting to initiate a team move in the next 12 months. Whilst those surveyed identified numerous advantages with the recruitment of teams, recruiting firms should not ignore the legal considerations and complexities to successfully navigate team moves in as risk free a manner as possible.

Key legal considerations

This article will briefly consider some key legal challenges which must be overcome by a firm looking to recruit a team. The nature and scope of these challenges will differ between partners (or members of an LLP) and employees. The importance of this distinction is explored in further detail below but, as may be expected, the obligations and restrictions to which a partner (or a senior employee) is subject are likely be more onerous.

Duties

Every employee owes their employer duties of good faith, fidelity and trust and confidence. This requires that an employee does not compete with their employer during employment. Partners, as owners of the firm, will be subject to more onerous obligations. These so called fiduciary duties will mean that they may be obliged to disclose their own misconduct and to report the plans and intentions of their team members. Partners may also be subject to more specific and onerous duties under the partnership agreement or members’ agreement to which they are bound. Leading the coordination of the recruitment of the team would clearly represent a breach of the partner’s fiduciary duties.

Confidentiality

Both partners and employees will be subject to confidentiality restrictions. These will be both implied by law and will also likely be expressly stated in their contractual documentation. Express confidentiality restrictions commonly prevent the disclosure of any confidential information during employment and indefinitely thereafter. A breach of such an obligation would occur if details of the team, including performance and appraisal information and salary packages, are shared.

Restrictive covenants and other contractual obligations

Restrictive covenants are broadly split into prohibitions relating to clients (competing with their current firm, soliciting work from and/or carrying out work for certain clients) and prohibitions relating to the recruitment of employees.

For senior employees, such restrictions may be in place for up to 12 months following termination of employment and the recruiting firm should factor these in when drawing up business plans and revenue forecasts for that initial period. However, partners may be subject to more onerous restrictions, including restrictions preventing them from joining a competitor for a period of time (sometimes as long as 12 months) and/or two year client restrictions. Members’ agreements or partnership agreements may also have specific team move restrictions prohibiting more than one individual from a particular firm joining a competitor in a defined period of time.

In addition to team members needing to take care not to breach their restrictions, the recruiting firm should ensure that it does not induce recruits from breaching their restrictions. Such inducement may be inadvertent but it could still find itself subject to successful claims against it. This does make it important for the recruiting firm to understand the restrictions to which each of the recruits is subject.

Other considerations

One issue that can sometimes be overlooked in a team move situation is whether the UK transfer regulations apply. There have been instances where it has been found to apply because the team have been performing a specific and identifiable business at the current firm that by their move is transferred to the recruiting firm. In such a situation, the implications of TUPE should be considered. 

Enforcement

The current firm has a number of choices about how to enforce these obligations and restrictions and minimise damage to its business caused by the departing team. The most immediate way is to seek an interim injunction to ensure that the team and new firm act in accordance with the restrictions in place pending the full trial. Alternatively, “springboard injunctions,” which seek to prevent the recruiting firm from benefiting from the wrongdoing of the team during the recruitment, have been successfully obtained where team moves have occurred in the past. The ultimate sanction sought might be financial damages.

Given the expenses associated with litigating in this space, it is not uncommon for the two firms to negotiate an agreed position. This might be financial or may include guarantees that post-termination restrictions will be respected (in part or in full) and the recruiting firm not will not be pursued for any inducement claim.

Strategies

It can often be hard to conduct a team move without breaching one or more of the above. To manage the risk, there are a number of strategies that could be deployed by the recruiting firm:

-          Creating a clear and structured recruitment plan at the outset. Obtain legal advice early in the process to ensure the recruiting firm and/or team members understand their obligations and restrictions

-          Make clear from the outset to the partner, or the most senior member of the team, that there should be no communication with others in the team, especially encouraging them to move

-          Involve a recruitment agency or head hunter in the identification and recruitment of the team

-          Carefully consider how communications should take place – using electronic devices and email accounts belonging to the current firm should be avoided. Consider keeping communications verbal only.

Certainly, team moves represent a great way for a firm to move into a new territory, a particular business area or expand upon an existing business. However, it is important from the initial discussions of a team move to take into account the legal challenges and develop a strategy to minimise risk around these. Doing this will result in a much smoother transition of the team to the new firm and quicker growth.

Christopher Perkins is an employment solicitor at PwC. 

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17 October 2016

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