This recent high-profile High Court case, in which the McDermott employment team acted, was about team recruitment. The litigation was conducted between two of the City’s leading inter-dealer broker firms and provided valuable guidance for potential ‘poachers’, ‘gamekeepers’ and their ‘prey’.
We will shortly be organising a round table seminar on team poaching for clients who have a particular interest in this area, and who wish to take part in an in-depth discussion of the valuable lessons on team recruitment strategy and planning to be learnt from the case. In this Alert we focus on the key findings made in the case which are of broader relevance.
What did the Court decide?
The High Court held that:
in a constructive dismissal situation, an employee can rely on a fundamental breach of contract by the employer to justify resignation even if the employee: (a) did not resign in response to it; and (b) did not even know about the breach at the time of resignation;
the fact that an employee has committed an earlier breach of contract (that has not been accepted by the employer) does not preclude reliance on a later breach by the employer to justify the employee bringing the employment contract to an end;
contractual provisions that entitle an employer to recover some or all of a retention payment/loyalty bonus upon resignation are valid. They were found, in this case, not to be unlawful (and therefore void) either on the basis that they were: (a) in restraint of trade; or (b) a penalty clause.
What does this mean for employers?
If an employee successfully argues that he or she has been constructively dismissed (because the employer has committed a fundamental breach of contract) the contract is treated as being at an end. This means that the employer loses the other benefits of the contract e.g. post-termination restrictions (“PTRs”).
The Court’s conclusions on constructive dismissal mean that we can expect resigning employees, who want to avoid PTRs, to look for breaches of contract that the employer may have committed during the employment, with a view to relying on those to justify non-compliance with PTRs.
Employers should note, though, that in order to claim compensation for constructive dismissal from a Tribunal the employee will still have to show that he/she resigned because of a fundamental breach by the employer which they must identify for the Tribunal.
Both parties in breach
Another recent case had suggested that an employee who had previously committed a breach of contract could not accept a later breach by the employer. This judgment clarified that this is not the case, which means that any future arguments to this effect are unlikely to succeed.
An employee can behave badly and breach the contract of employment and then go on to rely on the employer’s bad behaviour to justify resigning in high dudgeon.
Recovery of retention payments and bonuses
Tullett had paid signing on payments and bonuses, 75% of which were expressed to be in order to secure the future loyalty of its employees. Tullett reserved the contractual right to recover some or all of these sums from the employees if they resigned (for any reason) before the end of their (lengthy) fixed term employment contracts. The employees argued that these provisions were void either as an unlawful restraint of trade or as an unlawful penalty clause. The Court rejected both arguments, deciding that:
the provisions were not an unlawful restraint of trade because they did not affect the employee’s right to work after leaving. They simply required repayment if the employee did not serve out the full term of the contract. The Court was influenced by the fact that, in this instance, substantial sums had been paid to highly paid employees as a reward for loyalty;
the provisions were not a penalty because they simply provided for repayment of a sum paid by the employer if the employee resigned.
The Court was influenced by the fact that these were “intelligent, successful men capable of driving a bargain”, but said that the legal position was in any event “plain”. This decision should therefore give comfort to employers who include provisions in employees’ contracts requiring, for example, repayment of bonuses or external training costs if an employee resigns within a set period of time.