Category Archives: Employment and HR

Are personal injury lawyers ‘more sinned against than sinning’?

Jonathan Wheeler looks at the barrage of reforms facing the personal injury sector in England & Wales

Personal injury lawyers in the UK have a bad press. If you believe all you read, you would be forgiven for thinking that the courts are awash with fraudulent claims, and so-called fat cat solicitors are preying on the misery of injured people.  Whilst this is fake news, the sector has awakened the ire of those in charge, and as a result it is facing an unprecedented onslaught of reform.

It is true that some made a good living in the world before the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) 2012, an unlikely title for a statute which did away with recoverable success fees in conditional fee agreements a year later. Success fees since April 2013 are now paid by those bringing successful claims, ensuring that claimants have “skin in the game” as former justice minister Jonathan Djanogly indelicately phrased it when he introduced the measure.

Since then a number of personal injury firms have gone out of business,[1] and the future looks uncertain for many others, including key players in the claimant personal injury market. This is not enough for the Government which appears to have been swayed by partial information from the Association of British Insurers to target personal injury lawyers and their clients with further, and multiple layers of reform. In the Government’s stated wish to reduce insurance premiums, hoping that those savings will reach the public, they risk destabilising the sector further, whilst diminishing the legal rights of its electorate.

Reforming compensation for ‘minor’ whiplash claims and the small claims limit

One major plank of the Government’s reform programme comes from the Ministry of Justice. It proposes to do away with general damages for ‘minor’ whiplash claims (‘minor’ being defined as pain, suffering and loss of amenity of up to 9 months’ duration). This presents an attack on the rights of this country’s citizens and is likely to be unlawful for as long as we stay within the European Union. The alternative limited tariff scheme would equate the pain and suffering for a soft tissue neck injury with the sort of compensation one can claim for a flight delayed by over 3 hours.

Additionally raising the small claims limit for all injury claims from £1,000 to up to £10,000 puts the moderately injured on the same level as someone suing for a lost rental deposit or a dodgy vacuum cleaner. Legal costs are not awarded to the successful party in the small claims court. Whilst it may be the appropriate forum for minor consumer disputes, it will present an unlevel playing field for unrepresented victims of accidents (unrepresented because it would be uneconomic to instruct a lawyer and pay them out of their damages). Litigants in person will be Davids pitched against Goliaths as the defendant will most likely be insured and have professional representation whichever court is handling the dispute. The Government is currently considering its response to its consultation which closed on the 6th January. Now is the time to involve your members of parliament to lobby the Ministry on your behalf, before it’s too late.

The Ministry of Defence and a scheme for service personnel injured in combat

In parallel, the Ministry of Defence is consulting on doing away with lawyers in a no-fault scheme for service men and women injured in combat. This is an attempt to side-step the consequences of the judgment in Smith v Ministry of Defence[2] which involved the supply of inadequate equipment (Land Rover vehicles)  to soldiers in a combat situation in Iraq. There is a serious constitutional issue here: a defendant Government department, which pays out on claims because of the negligence (or worse) of its employees, is planning to legislate to do away with the rights of those wronged to sue them in court in certain situations. Instead, the defendant sets up a scheme where it is judge and jury over its own wrong doing. The courts perform an important function in evaluating the merits of a claim independently and holding power to account; the Government is strangling legitimate opposition. Its consultation closes on the 23rd February so there is still time to have your voice heard.

A ‘fixation’ with fixing fees

In a related move, the Department of Health is consulting on a fixed fee process for clinical negligence claims. Having been trialled as applying to cases up to £250,000, the Government appears to have been persuaded to limit the scheme to cases worth £25,000 and under. Claimant lawyers have breathed a sigh of relief. But again this is an example of the defendant (the Government) legislating to control the process, and the costs that will be paid, to those patients who have been negligently treated at that defendant’s hands. The long-awaited consultation was only published on the 30th January this year and closes on the 1st May

What is it with the “powers that be” and their apparent fixation with fixing costs? We already have a fixed cost regime for the vast majority of personal injury claims worth up to £25,000 and costs budgeting for those above that. We also have a perfectly good system called detailed assessment for losing parties to challenge winning parties’ bills with judicial scrutiny of the process. But the move to fix ‘anything that moves’ is relentless:  the Civil Justice Council’s work on fixing fees in noise induced hearing loss claims must be nearing its conclusion.

In a similar vein, Lord Justice Jackson has been tasked with looking at fixing fees in the multi track for cases worth up to £1/4 million. One cannot fix fees fairly without fixing the process, and personal injury claims (or for that matter any unliquidated claim) of that value do not conform to stereotype. Lord Justice Jackson’s previous reforms recognised this and introduced costs budgeting for such cases – a bespoke solution, to control costs for each case, depending on the work required in that case. If fixed costs are to apply to personal injury claims, and are not fixed fairly, then more costs will fall to be paid by the claimant, flying in the face of one of the fundamental tenets of tort law, to put the claimant back to the position they were in, had the wrong not been done to them, as much as money can achieve that aim.[3]. This was very recently approved in the Supreme Court judgment of Knauer v Ministry of Justice[4] where the two most senior judges in the land, Lord Neuberger and Lady Hale, President and Deputy President of that court said:

“It is the aim of an award of damages in the law of tort, so far as possible, to place the person who has been harmed by the wrongful acts of another in the position in which he or she would have been had the harm not been done:  full compensation, no more but certainly no less”.

Lord Justice Jackson’s report on the issue is set to be published in July 2017. He needs to understand that injury claims valued from £25,000 to £250,000 are not ‘minor’. They will include fatal accidents and those which have resulted in life changing injury. The concern is that fixing costs on a ‘one size fits all’ basis will inevitably mean that the costs will not pay for all the work which needs to be done to prove the case. The only solution (save for not bringing the case at all) is for a claimant to pay an increasing amount of his lawyers’ fees from his compensation, money perhaps earmarked for care or adaptations, or to reimburse lost earnings. The onus is on the claimant to prove their case to the satisfaction of the court, and our current adversarial system cannot be compared with international models where such claims are dealt with in an inquisitorial way, and where the judge has a much greater role in preparing the case and looking for the truth.

Let us end this hiatus, let the reforms we have already endured bed-in, and review using empirical evidence. Those in charge – the Government, the judiciary, the Civil Justice Council – should not pander to the wishes of an insurance industry which first and foremost looks after its shareholders and not injured people.

The silver lining?

On the 7th December, the Lord Chancellor somewhat surprisingly let it be known that she was going to pronounce on her department’s long running (almost 7 years’ long) review of the discount rate. If reform is recommended, then this is likely to have the most spectacular impact on damages for those who have been seriously injured. The discount rate is the expected rate of return for the future investment of damages, and as such it is ‘discounted’ from an award paid by the tortfeasor. Since 2001 it has stood at 2.5% per annum, originally based on safe gilt yields. But no one can achieve a rate of return of 2.5% these days, unless (possibly) a claimant invests in much riskier stocks. But why should claimants take such risks with their compensation, which may be needed to pay for future care, treatment, adaptations and equipment to help them live their lives as comfortably as possible as an injured person? The Association of Personal Injury Lawyers has been calling for a review for years – they suggest that in line with current gilt yields the rate should be –0.5% or -1%. It can be seen that that would have a massive effect on damages awards for the most seriously injured. The reality is that our own court system has been systemically under-compensating claimants for years and this is an opportunity to redress the balance. The Association of British Insurers – whose members clearly stand to lose if the rate is reduced – attempted to stop the Lord Chancellor by way of judicial review last month; that was defeated.  But the Lord Chancellor has since delayed her announcement, whilst promising more news in February. I hope she does the right thing for seriously injured people.

[1] Firms that disappeared last year, citing changes in the personal injury claims sector for their closure, included big players Parabis Law and Prolegal, as well as Carter Law, GT Law, and Mendell Solicitors.

[2] Smith & others v MoD [2013] UKSC 41

[3] Livingstone v Rawyards Coal Company (1880) 5 App Cas 25

[4] Knauer v Ministry of Justice (2016) UK SC 9

UK National minimum wage changes

Minimum wage changes have traditionally always taken place in October.  However, the introduction of the national living wage in April 2016 gave us a new date in the diary to keep an eye on.

Introduced at £7.20 per hour as essentially another band of minimum wage, the national living wage has now been in force for almost a year and stuck at its introductory rate, despite the other minimum wage bands increasing in October 2016.  April 2017 will see the next set of changes, to all bands of minimum wage.

From 1 April 2017, the rates will be:

25+ (National Living Wage) £7.50 per hour
21 to 24 (Standard adult rate) £7.05 per hour
18-20 (Development rate) £5.60 per hour
16-17 (Young workers) £4.05 per hour
Apprentice £3.50 per hour
Accommodation Offset £6.40 per day

 

2016 also saw the financial penalty for non-payment being doubled, meaning 200% of arrears will be due (although this will be halved if the employer pays within 14 days).  HMRC also continues to name and shame employers who have underpaid, as well as impose penalties of up to £20,000 per worker and refer cases to the CPS for a criminal prosecution.

Since the introduction of HMRC’s ‘name and shame’ list in October 2013, 687 employers have been named and between them, owed over £3.5 million in underpaid wages.  August 2016 also saw the biggest list since its introduction, with 197 companies named, owing just over £465,000.  A company’s name going onto the list itself doesn’t happen lightly.  Before being named, employers will have already received a notice of underpayment, which includes the opportunity to appeal.

HMRC also recently released a ‘top 10 worst excuses’ for not paying the minimum wage which, somewhat comically, included a worker not deserving the minimum wage because she “only makes the teas and sweeps the floors”, an employer and his accountant speaking different language meaning the accountant doesn’t understand the correct wages, an employer thinking it was “okay” to pay foreign workers below the minimum wage rate because they aren’t British and shop workers only being paid when they are “actually serving someone”!

Sue Evans, Partner in Lester Aldridge LLP’s Employment and HR Team, commented “It is still worrying to see just how many businesses fall foul of their minimum wage obligations and with the government increasing the enforcement budget available to HMRC, as well as the penalties for non-payment, it’s something employers need to keep on top of”. Ends

Providing outstanding legal advice, Lester Aldridge has core practice areas in real estate, litigation, private client and commercial services, which it delivers nationally and internationally through its global alliance with MSI, a network of professional service firms.

For advice and assistance with minimum wage obligations, please contact Sue or a member of her team on 01202 786 161.

UK Apprenticeship levy

In force from 6 April 2017, the apprenticeship levy will apply to all employers (including private and public sector employers, as well as charities and educational groups) with an annual pay bill of more than £3 million. The levy, charged at 0.5% of the annual pay bill, aims to increase the quality and quantity of apprenticeships, and fund three million apprenticeship schemes by 2020.

A levy allowance of £15,000 will be offset against an employer’s levy payment, meaning payments will only need to be made in respect of 0.5%, which exceeds £15,000. Only one allowance will apply and so employers with multiple payrolls cannot claim multiple allowances. The levy payment will be collected monthly by HMRC, alongside the usual PAYE payments.

Once paid, the levy will be accessed via the new Digital Apprentice Service account, which employers, after registering their details online, will be able to access and draw down vouchers for each of their apprentices. Vouchers can be used from May 2017 but only with registered training organisations. Vouchers can be used on new or existing staff, provided they and their training needs meet set criteria (CPD training does not fall within the apprenticeship standards). Vouchers can also only be used towards training, as opposed to apprentice salaries, travel costs or costs associated with setting up an apprenticeship.

The government will also apply a 10% top up to the apprenticeship funds available in an employer’s account and funds will remain in that account for 24 months, unless spent on apprenticeship training. If unspent, the funds will simply expire after 24 months, although a ‘first come, first served’ approach will be taken and the oldest funds will automatically be used first, in an attempt to minimise the amount of expired funds.

The government has introduced anti-avoidance measures, however if these measures cannot counteract the advantage gained by the business, it will be denied the £15,000 levy allowance for the tax year.

Catharine Geddes, Employment Partner and Head of HR at Bournemouth-based Lester Aldridge, commented: “Employers who pay into the levy scheme should be given access to the Digital Apprentice Service in February 2017 and they can then better plan how the new apprenticeship scheme will work for them. Employers who don’t need to pay the levy should also consider where apprenticeships can best fit within their businesses as the government has confirmed it will contribute at least 90% towards the cost of apprenticeship training, with other grants and funding arrangements being available for small employers ”.

For advice and assistance with apprenticeships and the levy, or any aspect of employment law and HR, please contact Catharine or a member of her team on 01202 786 161.

Approaching five years PQE? – It’s time for a career spot-check

Lawyers approaching the five year post qualification mark tend to use this milestone as a time to take stock of their career. It is seen as a good time to assess whether you are truly happy in your current role and direction, and whether it is likely to deliver on your ambitions over the next five years.

We are not necessarily talking about lawyers who are unhappy in their current role, it’s about assessing where you want to be professionally in the coming years. In fact, a good proportion of the lawyers say that their current role/firm can satisfy their mid-term goals.

So what about you? Have you given your career a mini spot-check as you edge towards that five year PQE mark?

The starting point is to work out what is important to you now and what you anticipate being important to you in the long term (of course that latter can change with time). It tends to be that remuneration aside, the biggest considerations for lawyers at this stage centre on one of the following:

(1) Progression

(2) Work/life balance and flexibility

(3) Private practice Vs In-house

Let’s examine each of these areas so that you can give your own career a mini spot-check.

(1) Progression prospects – Climbing the ladder

The first question to ask yourself is “Do I want to be a Partner in a law firm” Yes or No?

“No”

If you’re starting to feel that the answer to this question might be “no” then don’t worry – you are not alone. There is an increasing number of lawyers who are less attracted by the idea of partnership and the responsibility that comes with it.

That is not to say that you are not ambitious, but maybe that your motivators and ambitions have changed. If you’re more motivated by quality of work than responsibility and management, is your current firm allowing you to focus on the fee-earning and client side of your role? The motivators in sections (2) and (3) below might strike a chord with you.

“Yes”

Others do remain completely focused on reaching the partnerships milestone. If you fall into this category there are two further questions you need to ask at this stage in your career:

  • Am I realistically going to reach partner at my firm in the next five years?
  • And the even bolder question – Do I want to be a partner at this firm?

If you are unclear on either of these questions, then it is time to take stock. Remember, if you leave a lateral move until a later point in your career, firms will expect more from you. You’ll be a more senior, more expensive hire so will have to expect elevated scrutiny around the strength of your network and client following.

A lateral move later on in your career will also require you to re-establish yourself internally and this can take time. That is why the four/five year PQE mark can been seen as the perfect time to take the plunge, as it gives you ample time to establish yourself on both fronts.

Recruitment decisions at the four/five year PQE mark are more centered on expertise and ability and less on external network – of course showing an appetite for business development is a plus. Equally, at this time in your career, firms will still see you as fairly malleable – if you are looking to make the step up into a larger firm it is not too late. It may become trickier to do so the longer your career progresses.

As for the second bullet point, if you are already having doubts about your current firm then it is definitely time to take stock! Perhaps you’ve seen some of the frustrations and red tape the partners at your firm face. In this case a move to a smaller firm may work. Some may see this as a risk but being part of a smaller team can expedite your path to partnership. You’re also likely to get a lot more autonomy, allowing you to develop your own brand and client base.

(2) Work/life balance and flexibility

Your priorities may have changed. What might have seemed like a great lifestyle and career path as a junior solicitor might not seem so attractive any more. Working at the very best firm and acting for the very best clients often comes with a compromise – your own free time.

The search for a better work/life balance is without a doubt one of the biggest reasons lawyers register with recruitment specialists. This has been even more evident in recent years. As the market picked up post-recession, a lot of teams suddenly needed to recruit en masse to meet client demand, but soon realised there was a lack of quality talent. As a result, talented junior lawyers have been under immense pressure, often working very long hours and weekends. Sure, some might say that this is part and parcel of being a lawyer but many have realised that it doesn’t have to be the norm.

The legal recruitment sector has helped a large number of lawyers make a move before the five year PQE mark – moving to firms with a genuine focus on flexibility and policies such as part-time hours, remote working and job sharing. It’s not an urban myth – these firms really do exist! What has been refreshing for a lot of these lawyers is that they have not had to compromise on the quality of work and have actually enjoyed a lot more client exposure.

A lot of teams still remain bereft of quality mid-level lawyers due to the recession and natural attrition. Recruitment experts are seeing a lot of the more regional/national players snap up talent from the larger firms by allowing more flexible working.

(3) Private practice Vs In-house

Lawyers often see ‘in-house’ as the perfect escape from the headaches and hazards of private practice. After all, doesn’t life as an in-house solicitor allow you a more manageable work/life balance and the chance to move to move away from a KPI/chargeable-hours culture?

It really depends on the in-house organisation and role. Global recruiters such as Michael Page, have certainly seen a lot of private practice lawyers move in-house and never look back. They feel like a valued part of the wider commercial team and a lot closer to the commercial rationale of the legal advice given.

Equally, recruiters have spoken to in-house lawyers who have longer (and at times more stressful) working days now than they did in private practice. You really need to think carefully about what is motivating your desire to move in-house and whether you have found the right role for you.

It is certainly an option to be thinking about as you approach five years PQE. The more senior in-house roles tend to prefer someone with previous in-house experience, whereas lower level roles can often be more flexible thus allowing a lawyer to make that first jump from practice to in-house.

Whatever you decide to do at this stage you have a wide array of options in front of you and are in a position to make choices about the mid and long-term trajectory of your career.

The Brexit Effect; how employment legislation will be affected by the UK’s new independence

More than six months have passed since the historic Brexit vote and the subject has remained ever present on the news agenda. Recent events have now revealed a date to look towards as PM Theresa May has announced she will trigger article 50 by the end of March 2017, which means the UK will be non EU members by the middle of 2019.

Here, Richard Thomas, Employment Law specialist and Partner at Cardiff and London based law firm, Capital Law, looks at the potential legal implications the UK could face during the withdrawal process of Brexit, focusing on the potential repercussions on employment law.

Ever since the result of the much anticipated vote was announced, lawyers and civilians were cautious of the legalities that would be involved in the process of leaving the EU. This is predominantly because the Brexit camp never put forward any clear blueprint or model as to how the UK would govern its legal and trading relations once out of Europe.

This was in stark contrast to 2014’s Scottish Independence Referendum when the then Scottish Government published a prospective detailing how an independent Scotland would exist and function.

Theresa May’s decision to invoke Article 5O will serve irrecoverable notice of Britain’s decision to leave the EU. This will then trigger the two year negotiation period in which to conclude a withdrawal agreement.  We’re repeatedly told that ‘Brexit means Brexit’, but ambiguity abounds about what the term actually means in real terms.

The legal implications of such a withdrawal for the UK’s current laws are considerable. For example, the treaties, directives and regulations (and rulings of the European Court of Justice) will cease to apply in the UK unless their affect is specifically preserved by UK national law. Furthermore, the EU Court will no longer have jurisdiction over the UK and UK citizens will no longer have the rights of EU citizens.

What is clear is that there will be significant practical difficulties associated with the need to disentangle EU derived requirements from non-EU derived requirements, especially where case law has, for over 20 years, drawn on the UK Courts interpretation of EU directives and ECJ rulings.

In the employment law field, a significant amount of UK legislation and case law developments have stemmed from the EU and this has strengthened workers individual rights in areas such as working time and annual holidays. Other benefits that have arisen from our EU membership include family friendly policies, anti-discrimination legislation, and employment protection in the event of a change of employer.

Worker collective rights have also been strengthened by EU directives in the areas of collective redundancies, TUPE, European works councils and information and consultation obligations.

Redundancy consultation is a valuable piece of employment protection which could very well be watered down when we leave the EU. The current laws stem from an EU directive and state that collective consultation is required when over 20 people are affected. I suspect that this number will change after our withdrawal and will more likely increase to a minimum of 100 employees that need to be under consultation, although I doubt this will be a legislative priority in the immediate aftermath.

Most of the Working Time Regulations will remain. Paid holiday will certainly stay, and of course the UK gold-plated the European four weeks paid annual leave in the UK.

We also suspect that a ‘week’s pay’, which currently includes commission and overtime following ECJ rulings, will be pared back to what it was a few years ago, with just basic salary being paid as holiday pay.

Possibly the most talked about issue relating to employment is the future of British nationals living and working in other EU countries and vice versa. Previously, Liam Fox, the Secretary of State for International Trade, said that the future of British nationals in Europe is ‘one of our main cards’ in the ongoing Brexit negotiations. He said that no guarantee would be given to the two million EU nationals living in the UK until more information about the fate of British citizens living in Europe has been revealed.

Following Brexit, EU nationals would no longer have the automatic right to continue to work in the UK. It seems likely that the UK Government will agree with the EU a position whereby existing EU migrants can stay (at least for an agreed period) in return for permission for UK citizens working in the EU to remain where they are. It is also likely that the UK will introduce an immigration system similar to the current system for non-EU citizens, whereby skilled workers and students can gain permission to stay for a limited period. Undoubtedly, this could have an impact on some UK businesses if significant restrictions are imposed on their ability to recruit labour from the EU.

While the Brexit effect has already been felt across a number of industries, this is a fraction of what the implications will be when we formally leave the EU. Employment law will certainly be affected not only in the areas touched upon here but also within discrimination cases and data protection, which will both be reviewed upon our withdrawal.

Companies and employers should keep an eye on the news agenda to assess any further impact Brexit could have on recruitment, employment and immigration in order to stay ahead and safeguard their current employees before the legislation changes.

Counseling Early Stage Companies: Advance Preparation for the Exit

Representing early stage, high-growth companies often involves supporting a team of entrepreneurs to take a business from an idea, through commercial launch and market penetration, to a successful exit, often through an acquisition by a strategic or financial purchaser.  The speed and intensity of the client’s activity can be tremendous.  Under the pressure of achieving critical product development or revenue milestones – often driven by the client company’s investors – management will sometimes forego certain basic contracting, human resources and capitalisation  management measures.   Unfortunately, these short cuts will surface during the exit transaction, where the acquirer’s due diligence on the target company will spot these shortcomings in order to identify potential risks as well as opportunities to revalue the target company’s assets and business and reduce the purchase price.  The attorney representing the early stage company can streamline the exit transaction and minimise adverse due diligence discoveries by helping the client institute the following four relatively simple disciplines at the company’s outset (or at least at the outset of the counsel’s engagement), well in advance of any merger and acquisition considerations.

  1. Protect and Preserve Company Intellectual Property. For many early stage companies, intellectual property assets can represent the core of the company’s value at exit.  Those assets, of course, are generated by employees and contractors working on behalf of the company.  In the course of the company’s history, employees and independent contractors come and go.  However, sophisticated acquirers will often probe the target company’s files for potential intellectual property “leaks” or gaps – situations where employee or contractor inventions or developments may not clearly belong to the target company.The simple but often neglected solution to this due diligence red flag is drafting and religiously using a standard employment agreement or independent contractor/consultancy agreement with all new employees and service providers. These standard agreements should contain the following basic covenants:I. Confidentiality: Provisions prohibiting an employee or independent contractor from disclosing or otherwise using the company’s confidential information both during the relationship and for multiple years beyond the term of the agreement.ii. Invention Assignment: Provisions indicating that all “inventions, original works of authorship, trade secrets, concepts, ideas, discoveries, developments, improvements, combinations, methods, designs, trademarks, trade names, software, data, mask works, and know-how, whether or not patentable or registrable under copyright, trademark or similar laws” developed during the term of employment or contractor service belong to the company.  This covenant should similarly include an acknowledgement that all copyrightable material is a “work made for hire.”  Note that company counsel should confirm the impact of the applicable state laws on these covenants. For example, the “work made for hire” clause should be excluded from independent contractor/consultancy agreements governed by California law, as California law dictates that individuals subject to this type of covenant in a services agreement may be deemed employees under the California Labour Code .  Avoid the temptation to limit company ownership of employee or contractor developments to only those generated “on company time” or “using company resources.”  This limitation will only act to invite ownership ambiguity – an unnecessary impediment in the acquisition due diligence process.iii. Pre-existing Intellectual Property Disclosure and Licenses: Provisions obligating employees or contractors utilising pre-existing intellectual property in their work for the company to (i) clearly identify the pre-existing IP and (ii) grant the company a perpetual, transferrable license to use, in the course of its business, any relevant pre-existing IP included in works created by the employee or contractor for the company.
  2. Facilitate Shareholder Decisions. The decision to exit the business will naturally require the approval of both the Board of Directors and the shareholders of the company.  Minority shareholders who are no longer associated with the business, or who have a different perspective on the company’s direction and objectives, can seek appraisal rights, demand certain concessions, or take other steps to block or disrupt the transaction.  While reverse merger structures can be used to minimise the disruption caused by dissenting minority shareholders, these structures increase both transaction costs and the potential liability to the target company.The pre-emptive solution here is a basic shareholder agreement, prepared and negotiated when the early stage company’s shareholder base is relative small and cohesive. The shareholder agreement should include the following elements:i. Dragalong Rights. Terms requiring minority shareholders to support and vote with the majority on fundamental company decisions, including a vote to sell the company and/or waive of appraisal rights.ii. Buy/Sell Arrangements. Structures that ensure that the equity interests of disaffiliating shareholders are (or can be) repurchased by the company or the remaining shareholders;iii. Joinder Provisions. Requirements that all new shareholders (including those acquiring their equity interests through the conversion of debt) become signatories to the shareholder agreement.
  3. Simplify Contract Assignment. A major factor in the acquired business’ valuation is the status of its contractual relationships with customers, vendors, strategic partners and other third parties, and how easily an acquirer can continue to take advantage of those contracts following the acquisition. Contracts that include non-assignability clauses – provisions requiring counterparty’s consent prior to assignment – can greatly obstruct this transition, particularly if the transaction is structured as an asset sale (vs. a stock sale or merger). At best, these clauses can delay a closing while the target company pursues the counterparty’s consent, who may see an opportunity to extract a contractual concession from a vulnerable target.  At worst, the target company’s inability to obtain a counterparty’s consent may result in the termination or rejection of the contract by the acquirer, which can reduce the target company’s valuation.Since non-assignability clauses are often a standard part of the “boilerplate” sections of many agreements, and since solving the anti-assignment clause problem once the contract has been signed is difficult, if not impossible, company counsel should help the client implement the following prophylactic measures at the outset of the negotiations:i. Removal: Generally, the absence of a non-assignability clause in a contract allows both parties to assign the contract freely.ii. Change of Control Carve-Out: An exception that eliminates the need for the counterparty’s consent when the contract is assigned to a successor organization in the event of a merger, spin-off, or other reorganization, or any sale to any entity which buys all or substantially all of the assigning party’s assets, equity interests or business can eliminate the issue in an exit transaction.iii. Reasonableness Standard. As a fallback, incorporate a requirement that the counterparty’s consent to a contract assignment may not be “unreasonably withheld.” While this does not eliminate the need to secure the counterparty’s consent, it will impose a baseline legal standard which may facilitate the assignment negotiation.
  4. Maintain Good Corporate Capitalisation Hygiene. While cases of mystery shareholders appearing at the closing of an acquisition transaction are rare, confusion over the accuracy of the capital structure of the target company, as well as the identification of non-compliance with securities laws, can materially disrupt an exit transaction.  Common causes of capitalisation problems most often relate to (i) failing to either register or file a registration exemption with the Securities and Exchange Commission and/or state authorities in connection with the sale of private securities issued by the target company to early investors, which are usually friends and family, (ii) issues involving the company’s equity incentive plan, including unsigned documents, unclear vesting schedules, and uncertain stock repurchase provisions and exercise; and (iii) overlapping and conflicting convertible securities, including securities with conflicting conversion terms or circular conversion formulas. Many buyers will avoid assuming any risks associated with an ambiguous capital structure or improperly issued shares, preferring instead to let the target company identify and resolve discrepancies before closing.As with the other sets of issues described in this article, the preventive solutions are straightforward and, in most cases, inexpensive:i. Comply With Applicable Federal and State Securities Laws in Securities Offerings: Most states and the SEC have numerous exemptions allowing early stage companies to issue securities without the need for a formal registration.  The exemption process, however, often requires the issuing company to file a registration exemption with the appropriate securities regulator. Failing to file a registration exemption may not require the company to register its shares, but it may prevent the company from utilising a “safehabour ” in future transactions, including an exit transaction with another private company.  Filing the necessary registration exemption forms will not only help ensure securities law compliance; it will also provide assurance to a potential acquirer that these registration exemptions will remain in effect in future transactions.ii. Invest in a Commercial Cap Table Management Software. There are a number of quality, low cost software solutions on the market that can help track and automate company cap tables and “date-stamp” capital structure changes, in order to allow for a simple analysis of capitalisation changes and confirmation of issuances.iii. Automate the Effect of Certain Equity Incentive Plan Triggers. For example, if a company’s restricted stock plan provides for the buyback of unvested shares if the employee terminates, the company’s repurchase of those unvested shares should occur automatically.  Relying on the affirmative action of the company (and potentially the memory, or filing system, of the company’s executives) can result in inconsistent equity incentive plan operation and unintended equity ownership.

    iv. Create Pro Forma Models to Reflect the Terms of Convertible Securities. Going through the exercise of translating the terms of convertible securities – particularly where different securities are issued at different times to multiple parties – will help pressure test the conversion terms and validate that they function as intended.

The foregoing measures, designed to minimise exit disruption, are neither difficult nor time-consuming.  In fact, the most difficult task is often convincing the client company to expend the time, effort and resources to implement these disciplines, even years in advance of a potential exit.  As noted above, it is ultimately time and energy well spent.

It’s No Secret. Laws Combating Wage Secrecy Are Here to Stay

“Bob, don’t talk about your wages at work, please.”

“Fred, don’t ask about the wages of other employees, please.”

“John and Susan, don’t compare your salaries, please.”

Any of these statements by an employer could get the employer into deep legal trouble.  Telling employees not to discuss their wages can subject employers to lawsuits in several states.  The growing trend in wage secrecy laws, which typically include provisions forbidding employers from taking adverse employment actions against employees for discussing their wages, does not look like it will slow down anytime soon.

The Rising Tide

The rise in these laws began in the 1980s, when California and Michigan became the first states to enact wage secrecy laws.  Ten states—Colorado, Connecticut, Illinois, Louisiana, Maine, Minnesota, Oregon, New Jersey, Vermont, and New Hampshire—passed wage secrecy laws prohibiting employers from making adverse personnel decisions against employees, between 2000 and 2015.

Wage secrecy laws promote national and state legislation that require employers to equally compensate all employees for equal work, regardless of the employee’s gender.  According to the United States Department of Labor, in 2014, women who worked full time earned 79 cents to every dollar that a male earned.  One of the policy rationales behind wage secrecy laws is that if employees can freely discuss their wages and know what other employees are paid, employees can identify disparities in wages. 

In April 2016, Louisiana passed the Equal Pay for Women Act, a measure to eliminate pay inequality between men and women.  The Louisiana law does not allow employers to make an adverse employment decision against an employee for “inquiring about, disclosing, comparing, or otherwise discussing the employee’s wages or the wages of any other employee.”  Following suit, in August 2016, Massachusetts passed one of the country’s most robust equal pay laws, as the Massachusetts law bans employers from inquiring about job applicants’ salary history, as well as prohibits employers from taking adverse actions against employees for discussing their wages.

Like the Louisiana equal pay law, the Maryland Equal Pay for Equal Work Act, which went into effect on October 1, 2016, includes wage secrecy provisions that forbid an employer from taking adverse actions against employees for “inquiring about, discussing, or disclosing the wages of the employee or another employee; or requesting that the employer provide a reason for why the employee’s wages are a condition of employment.”  The law also bans Maryland employers from making adverse personnel decisions against employees for inquiring about another employee’s wages, among other provisions.  Several other states including, Ohio, Washington State, Virginia, South Carolina, Indiana, and Pennsylvania are currently considering similar wage secrecy legislation.

Violations Can Be Costly

Violating a wage secrecy law can be costly for an employer.  States impose various civil penalties for violations of its wage secrecy laws.  California employers may be required to reinstate an employee who has been terminated or suspended for discussing their wages as well as pay the employee for lost wages, including interest.  Colorado allows an employee who has prevailed in a lawsuit under its wage secrecy law to recover punitive and compensatory damages, if the employee can prove that the employer’s unlawful conduct was intentional. Violating Vermont’s wage secrecy law can require an employer to pay a prevailing employee compensatory damages, punitive damages, court costs, and attorney’s fees.

Although most states’ wage secrecy laws subject an employer to only civil liability, a Michigan employer can face criminal liability for violating the state’s law.  It remains to be seen whether more states will expand their wage secrecy laws to include criminal liability provisions.

Wage Secrecy Laws May Have Limited Exceptions

Several states do allow employers to limit discussion about wages in limited circumstances.  For example, some states such as New York and the District of Columbia do not allow persons with access to employees’ wage information as part of their job function, such as Human Resources personnel, to disclose those wages.  The exceptions to wage secrecy laws are limited, however.  As such, employer should tread with caution when limiting discussion about wages.

 Federal Trends in Wage Secrecy Laws

On the federal level, the National Labor Relations Act prohibits employers from taking adverse employment actions against employees for discussing the employee’s wages.  Several states’ wage secrecy laws track the language of the NLRA.  Further setting a national trend promoting wage transparency, in 2015, the Office of Federal Contractor Compliance Programs issued a Final Rule implementing President Obama’s Executive Order that forbade federal contractors from prohibiting their employees from discussing wages.  The Obama Administration introduced the Paycheck Fairness Act, which would ban an employer from taking an adverse action against an employee for discussing the employee’s wages.  However, Congress did not pass the legislation.

Congress’ failure to approve the Paycheck Fairness Act does not mean that the federal government will not be holding employers accountable for equally paying all employees.  In 2018, the EEOC will require covered employers to submit an updated EEO-1 form, disclosing the pay data of all employees.  The EEO-1 form currently requires covered employers to submit demographic information about employees, such as employees’ sex, race, and ethnicity.  The EEOC now requires disclosure of pay data in order to assist the EEOC in detecting discriminatory pay practices.

Wage Transparency is Here to Stay

There is no indication that the tide of wage secrecy laws is slowing down or even shrinking.  The District of Columbia currently has a wage secrecy law banning employers from penalizing employees for discussing wages.  Similar to the new Massachusetts law, the District of Columbia is considering legislation that would prohibit employers from asking applicants about their wage histories.

The increase in wage secrecy laws means that employers who do not want to be hit with a lawsuit should carefully review their employment policies to ensure that they do not unlawfully limit their employees from sharing wage information. Confidentiality and social media policies that have not been reviewed in a while should be dusted off and examined as soon as possible, as these are typical places that could get employers into hot water if they include provisions unlawfully limiting employee speech.  Finally, employers should stay abreast of applicable local, state, and federal laws regarding wage transparency.  These laws are likely here to stay.

How to Check Foreign Workers Rights

At the start of October 2016, it was announced by the UK Home Secretary, Amber Rudd, that businesses would be required to list how many foreign nationals they employ, in the hope that it forces more businesses to employ British workers. Ms Rudd said that foreign workers should not be able to “take the jobs that British people should do”.

In a world where we are taught to be accepting of all no matter their nationality, race, gender, or sexual preference, the move to effectively name and shame businesses who support foreign workers seems incredibly backward. And a new way of bringing to light the national origins of who businesses employ.

It’s important to note that the Home Secretary has said that the idea is currently being reviewed, and not policy, much less being a legal requirement which is enforceable.  Personally, I feel that these proposals will not be progressed any further, but they do evidence a renewed push on the part of the Government to discourage employers from failing to recruit UK nationals to fill gaps in the workforce.

Much is often made of the fact that overseas nationals are coming to the UK and working for less than British citizens, which then supposedly leaves UK nationals out of work. But many refute this claim and insist that without foreign workers many crucial roles would be left unfilled.

Whatever your personal or professional opinion on the subject, we’ve put together a guide to help you understand which rights you should be granting to citizens from abroad who are working in the UK.

What is a right-to-work check?

A right-to-work check involve you checking a document which grants an individual the permission to work in the UK. As an employer, it is your duty to check this before you employ anyone to ensure they are legally allowed to work for you. If you employ someone who has a time frame on the period they can work in the UK, then it is your responsibility to ensure follow-up checks are conducted.

You can take the following three-step approach to carrying out right-to-work checks:

  1. Obtain potential workers original documents
  2. Check these in the presence of the holder
  3. Retain a clear copy of the documents and record the date the check was conducted

As an employer, you have a duty to conduct checks to prevent illegal workers from working in the UK, if they are not permitted to do so. If you carry out the checks correctly, then you will have a statutory excuse against any liability which may be bought about in regards to civil penalties. Providing you have checked and documented the required checks then you will not receive a civil penalty if you were found to have employed an illegal worker.

Who should I conduct checks on?

You should carry out right-to-work checks on all potential employees no matter their nationality. As an employer, you should show no bias or discrimination against anyone who applies for the job role you are recruiting for.

No assumptions should be made about a person’s right to work in the UK based on their colour, nationality, ethnicity or national origins, accent or length of time they have been a resident in the UK.

Any breach you do make against the code of practice for employers may be used in evidence in legal proceedings – so act with precaution.

If no restriction to work in the UK is found, then you are not required to conduct any follow-up checks. However, if some restrictions on working are found such as a time-limited visa, then you are required to carry out follow-up checks.

What documents do I need?

Acceptable documents include:

  • Biometric Residence Permits
  • Residence Cards
  • Passports
  • Certificate of Registration or Naturalisation as British Citizen
  • Rights of Abode Certificates
  • European Economic Area documentation – passport or national identity cards
  • Permanent Residence Certificate
  • Certificate of Application that permits work
  • Asylum claimants need to supply a Positive Verification Notice
  • Entry Clearance Vignette

You should check documents are genuine and that the holder matches the documents they are presenting to you. You also need to ensure that the potential employee is able to legally carry out the work you are offering.

Things to look out for on documents include:

  • Check photographs and date of birth is consistent across all documents
  • Ensure expiry dates have not passed
  • Look at whether any work restrictions apply
  • Check documents have not been tampered with
  • Question the owner if difference across the documents occur. If these are easily explained ensure follow-up documents are obtained

You’ll need to make unalterable hardcopies of the documents you require and keep these for the duration of an employee’s time with you, and for an additional two years after employment has been terminated.

What happens if I employ an illegal worker?

If you don’t want to run into trouble with the law, then ensure that you conduct the necessary checks and always record the dates and documents which you were presented with. Employers who are found to have employed illegal workers may face up to five years in jail and be required to pay an unlimited fine, regardless of whether workers were knowingly employed illegally or if you had reasonable cause to believe they did not have the right to work in the UK.

If you had reasons to believe the following, then you may be found guilty of employing an illegal worker:

  • The worker had no permission to enter or remain in the UK
  • Their leave had expired
  • They weren’t allowed to undertake certain types of work
  • Their documents were incorrect or false

It’s your responsibility as an employer to ensure that you’ve carried out the checks correctly. Failure to do so can result in catastrophic penalties for your business both financially and in the eyes of the public.

While these new measures by Amber Rudd remain to be officially confirmed or come into effect, ensuring you are adhering to the rights of foreign workers now can allow you to stay ahead of the game should changes to the law be made.

The Time Has Come to Finally Address Gender Pay

It’s estimated that reducing the gender pay gap could add £150 billion to our economy by 2025, through increasing the number of women in work. It’s a figure – that as a nation – we wouldn’t ignore if it were to be added to our National Health Service or education system. So, why in the world of work are businesses still refusing to close the pay gap which alienates women and has the potential to destroy businesses?

New legislation which comes into effect from April 2017, will require businesses with more than 250 employees to report data relating to pay of both female and male employees. Yet, while the date is just over six months away, unless the gap is addressed in advance of the date, it could leave businesses on an unsure footing further down the line.

Considerable movements were made towards closing the gap back in 1970, with the Equal Pay Act and the Equality Act in 2010; it’s estimated by Deloitte that the gender pay gap still won’t be closed until 2069. With the gap currently standing at 19.4%.

Throughout our work we meet several organisations, and I don’t believe employers have a problem with meeting the new regulations; the time and resources required are easy targets to meet. The real issue lies with addressing any pay gap which is found – which the government are hoping the mandatory reporting encourages.

Our most recent research found that only 44% of organisations currently measure the state of pay within their business. 77% of those that do measure pay, do not report on their findings at all and only 1% publish the data externally – proving there’s clearly a long way to go until figures are published for all to see. While these figures will rise when the new legislation comes into play, ignoring the figures now will impact your business in the long term.

It’s a confusing time for businesses who are perhaps unsure on how to begin dissecting their pay data or address any pay gaps. However, one thing is for sure; gender pay isn’t an issue you can sweep under the carpet. Pay is one of the most emotive subjects in the workplace, so getting it right is key to your businesses success. 

What employers should do

If your business employs more than 250 members of staff, then you are required to report on baseline pay gap figures in April 2017 and then again in April 2018. The figures are then published at the latter date on your businesses website so that they are accessible to employees and the public for three years, as well as being submitted to the government through a dedicated portal.

Pay gap figures should include bonuses and car allowances. Bonuses can be a breeding ground for pay inequalities as they are often individually determined, thus increasing the number of gaps which occur. Pay and bonus figures are to be analysed and submitted separately.

Most importantly, any gaps that are found, are required to be investigated to see the main driver behind the figures. Businesses are then required to act to close the gap.

Put pay on the agenda

Don’t be put off by the fact that data won’t be published until April 2018 – the time to act is now. Depending on when you review employees pay, your 2016 figures may influence your baseline gap when measured in 2017. Those who review pay between May and December may find this to be the case, proving the 2018 deadline could be affected.

The government has stated, “If gender pay gap reporting is to have any impact, it must help employers understand why pay gaps exist and lead to action to address these problems. It must be the beginning of a process rather than the culmination of a tick box exercise.”

Businesses need to be fully invested in closing the gap rather than simply paying lip service to the legislation. A detailed audit will fully identify genuine pay discrimination and help to explain pay gaps which currently exist within the business.

Develop a clear process, like the below, to help you address gaps:

  1. Decide the scope of the review and identify the data required
  2. Identify where men and women are doing equal work, like work, work rated as equivalent or equal value
  3. Collect pay data to identify gaps
  4. Establish the cause of pay gaps and decide whether they are free from discrimination
  5. If pay gaps aren’t free from discrimination an equal pay action plan should be developed, if there are no gaps, this should be reviewed and monitored

Avoid business suicide

Whatever you do, don’t put the pay gap to the back of your businesses mind. It should be at the forefront right now or you could risk committing business suicide. Pay is so emotive that it has the potential to lead to bad feeling both internally and externally if you don’t handle gender pay reporting in the right way. Leading to a PR disaster and employees in uproar if you aren’t careful.

There have been several high-profile cases where big pay-outs were made by businesses and public image destroyed. Birmingham City Council were found to be liable for a £757 million settlement from equal pay claims from women who missed out on bonuses. A big hit to both finances and image.

Putting external views aside, if you refuse to address the gap you could face a wave of unrest among your employees. Identify any gaps and work hard to reduce them and the impact on employee engagement and retention is unmeasurable. Measuring the gender pay gap enables you to empower employees and prove to them they are valued and respected in their working environment. Thus, increasing their loyalty with you and improving productivity.

Clearly, the legislation is a step in the right direction in helping to close the gender pay gap once and for all. However, with no mandatory ruling in place that gaps are addressed, it seems the government are hoping the name and shame route will force businesses into reducing gaps and bring pay equality to their firms.

Tips for Effective Drafting and Enforcement of Restrictive Covenants

The speed of business in the 21st Century has undoubtedly placed tremendous burdens upon employers seeking to enforce restrictive covenants in the modern business world.   In today’s fast-paced and high-tech society, trade secrets can be lost with the click of an iPhone camera and customer information can be mined from protected databases and stolen through the use of an inexpensive flash drive.  Often, the only protection available to prevent further harm is the legal construct known as the restrictive covenant.  Yet, the restrictive covenant’s status as the great elixir is directly linked to its ability to be enforced.  The past decade has ushered in an era of tremendous conflict in connection with the relationship between employers who seek to hold employees accountable for agreements that control the end of the parties’ economic relationship, and the ability of employees to escape the enforcement of such agreements.   This article will explore the methods used in drafting and enforcing restrictive covenants.    

The Basics:

Restrictive covenants in the employment context seek to protect business interests of a corporation by limiting post-employment engagements of an individual or individuals who has moved on from the company.  As a general rule in all jurisdictions, our country’s courts will not allow a company to enforce restrictions if such enforcement will not benefit the legitimate business interests of the ex-employer. See, Guardian Fiberglass Inc. v. Whit Davis Lumber Co. 509 F.3d 512 (8th Cir. 2007).  This notion stems from the fact that our judicial system considers restrictive covenants to be a restraint upon trade by their nature.  This is of course balanced against the parties’ inherent freedom to enter into a contract, which has led courts to a common ground in most jurisdictions.   In large part, most jurisdictions will not issue a blanket prohibition against restrictive covenants and will uphold restrictive covenants to the extent that: 1) the restriction is fair and reasonable and; 2) protects a legitimate business interest.   In determining what constitutes a legitimate business interest, courts usually identify trade secrets, confidential proprietary information, goodwill and special training as protectable property of the business.  With these protectable interests in mind, it becomes essential for the employer to identify how to protect each interest and specifically tailor the agreement to meet its specific needs.   Stated another way, there is no “one size fits all” restrictive covenant.   Business owners and employees must narrow their proposed agreements to match their specific needs.  Doing so requires an understanding of the various types of agreements that are classified as follows:

Non-Competition Agreements:  A Non-Competition Agreement prohibits a former employee from engaging in an employment or ownership affiliation with a competing separate entity or group.

Non-Solicitation Agreements:  These agreements protect against employees who solicit current and or former customers. 

Non-Disclosure Agreements:  These agreements prohibit the employee from utilising and or disclosing trade secrets and confidential information belonging to the employer.

Non-Poaching Agreements:   Non-Poaching Agreements are also commonly referred to as “anti-raiding” covenants and bar employees from hiring away employees to join a new entity.

Given the various types of restrictions available to business owners, it is critical at the outset for the drafter to identify, with particularity, what specific business interests the company seeks to protect.  After identifying the company’s needs, the framework of the agreement may be constructed in a manner that avoids the common pitfalls that have a detrimental effect upon the enforcement of restrictive covenants.  Aside from these agreements, one should be mindful of the separate common-law duty of loyalty in many jurisdictions which prohibits employees from acting in a manner that is contrary to the best interests of the employer during the employment relationship.

Effective Enforcement of Restrictive Covenants Begins with The Drafting of An Effective Agreement – What Every Business Owner Should Know:

When drafting a restrictive covenant, the practitioner must always be mindful of the notion that courts in all jurisdictions historically characterise restrictive covenants as a restraint upon trade.  Because of the judiciary’s conceptual concerns over the restraints presented in this setting, the drafter must be especially mindful of the fact that the agreement must be precise in its scope and more importantly, should only go as far as necessary to protect specific business interests.  Drafters of restrictive covenants should take great care in avoiding the common mistake of creating a covenant that will not stand judicial scrutiny on account of the overbroad nature of the restrictions placed upon the departing owner or employee.  A hallmark of an effective agreement achieves a delicate balance between the protection of the business’ legitimate interests and fairness to the departing individual(s).  

Avoid Broad Geographic Restrictions At All Costs

One of the most critical errors in the process of drafting a restrictive covenant occurs when a party attempts to inject an overly protective limitation on the area in which the departing party may operate a business.  A restrictive covenant must be reasonable in its geographic area.  Generally, this limitation is defined as the area where the existing company does business.  Depending upon the nature of the specific business at issue, the geographic areas often vary and are best described as economies of scale.  While there is no bright-line rule per se, it is generally accepted that geographic restrictions contained in restrictive covenants can restrict an area as small as a few miles as in the case of a “mom and pop” business, or can span the continent as in the case of a large corporation.  Because of the uncertainty attached to geographic limitations, recent strategies in drafting restrictive covenants often de-emphasise a detailed geographic restriction in favour of protecting confidential information and or trade secrets.  By focusing on the information, not the location of the business, the covenant is more likely to be found to be a reasonable protection of a legitimate business interest as opposed to an unreasonable restraint on trade.   Through careful craftsmanship of a targeted and precise geographic restriction, or alternatively focusing on confidential information, (not location), the restrictive covenant is more likely to withstand any challenge, and will likely be enforceable.

Avoid Lengthy Periods of Restriction

Because excessive restrictive periods will not be enforceable, the drafting of an enforceable restrictive covenant requires the infusion of a reasonable time period controlling the former employee or co- adventurer’ conduct toward existing or former customers and the handling of confidential information.  Typically, these the types of restrictions: 1) aim to control the length of time that an individual must refrain from soliciting the employer’s clients or customers and; 2) prohibit the use of  business’ confidential information.   With regard to the former, the duration and the nature of the customer relationship are critical factors in determining whether the prohibition from soliciting customers is reasonable.  In these instances, the duration of the restriction is generally reasonable only if it is no longer that necessary for the former employer to put a new employee to work as a means to demonstrate his or her skill-set in satisfying the former employer’s clients and customers.

In the case of confidential information, the focus shifts to the type of information being protected, not geography. A key consideration in this regard is the length of time the information remains confidential before it becomes part of the public domain or stale and unusable.  The longer the time the information retains its confidentiality, the longer the restrictive period will be found to be reasonable.   By examining the nature of the relationship between the customer or client and the identification of the of information being protected, the period of the restriction set forth in the agreement can be gauged appropriately which will protect the terms of the agreement from collateral attack.

 Identify Whether the Agreement Contains Proper Consideration

Because it is a contract, a restrictive covenant must have adequate consideration (a bargained for exchange) for the covenants to be enforceable.   The most common form of consideration is contained in a services agreement, such as an employment agreement where the owner receives services from the employee in exchange for salary.   In a variety of states, the act of requiring a new employee to sign a restrictive covenant at the commencement of employment as well as conditioning an employee’s continued employment upon execution of the agreement are considered valid consideration.   However, the concept of employment as consideration is not universally accepted in each state and it is imperative for the practitioner to be aware of the jurisdiction’s treatment of employment as adequate consideration.  For example, New Jersey courts hold that employment is valid consideration in a restrictive covenant, whereas Pennsylvania courts hold that mere continued employment is not sufficient consideration and will not enforce a restrictive covenant absent some additional consideration.  See, A.T. Hudson, 216 N.J. Super. at 431-32 (non-compete signed at hire supported by adequate consideration) But See, Socko v. MidAtlantic Systems  of CPA,  105 A.3d 659 (2014) (holding that continued employment is not sufficient consideration to support a restrictive covenant under Pennsylvania law.)   Because of these conflicts of law, drafters must be keenly aware of their state’s handling of employment as consideration to avoid challenge to the sufficiency of the entire agreement.

Be Cautious With Choice of Law and Forum Selection Provisions

Choice of law and forum selection clauses can present significant risks in the context of restrictive covenants because not every jurisdiction treats restrictive covenants in the same manner.  There exists a strong possibility that selection of a choice of law clause could have unintended consequences which prove fatal to the enforceability of the agreement.  For these reasons, parties drafting these types of agreements must exercise due diligence and familiarize themselves with the procedural and substantive law of the foreign jurisdiction.  For example, restrictive covenants are void as a matter of law in California except for a small number of limited circumstances expressly authorized by statute, e.g., where owner is selling goodwill of business. California Business and Professions Code § 16600.  Similarly, not all states honor forum selection clauses, effectively rendering the parties’ intent moot.  To avoid the latent dangers associated with these provisions, it is extremely important for the parties to familiarize themselves with relevant state law in both choice of law and forum selection settings.  Otherwise, these seemingly innocuous provisions could have potentially devastating ramifications upon the enforceability of the agreement.

 The Importance of Confidentiality Agreements

 As mentioned above, a confidentiality agreement protecting the company’s confidential information is independent of  the tighter restrictions of non-competes.  For this reason, it is worthwhile to explore the utility in drafting a confidentiality agreement in tandem with a restrictive covenant insofar as the confidentiality provisions may withstand scrutiny when a restrictive covenant fails.

Strategies For Enforcing Your Agreement

Armed with an agreement that adheres to the foregoing characteristics and honed to the particular laws of the relevant jurisdiction; a party seeking to enforce the agreement by obtaining a remedy for a breach of the agreement can confidently pursue an action at law and equity in several ways:

The Injunction

In a majority of jurisdictions, injunctive relief fashioned to prevent further violations of a restrictive covenant is available under specific circumstances where the relief is necessary to prevent irreparable harm, meaning that the damage cannot be remedied by monetary damages.  For example, acts such as disclosing confidential trade secrets and interfering with customer relationships have been recognised as conduct that sufficiently rises to the level of irreparable harm in various state and federal courts.

Money Damages

Monetary damages may be recovered against a former employee who violates a valid and enforceable restrictive covenant as a means to place the injured party in the position it would have been in but for the action of the party who breached the agreement.  In determining the amount of damages that may be recovered, courts will typically review what the expectations of the parties were at the time of the agreement and will analyse the foreseeability of the harm caused by the breaching party in setting the amount of monetary damages.

Having an agreement that comports with the above principals will

The Blue Pencil Doctrine:

In many jurisdictions, even where = certain portions of the parties’ agreement may be found to be unreasonable, all may not be lost.  Restrictive covenants containing certain unenforceable provisions may still be enforced to the extent reasonable under the circumstances.  In various jurisdictions known as “Blue Pencil States”, the courts have broad equitable power to grant partial enforcement of a restrictive covenant both by removing offensive terms and by adding limiting language in order to grant an employer only that protection which the court deems necessary; to protect what the court’s deem to be legitimate business interestsThis principle allows courts to redraft an unreasonable restrictive covenant to make it reasonable and, therefore, make it enforceable based on the equities in the case.  The doctrine, known as the “Blue Pencil Doctrine” is not universal and must be analysed on a state by state basis.

While the restrictive covenant is not the perfect elixir on all occasions and in all locations, if properly utilised, it can be the best line of defence against threats to the very existence of a business.  However, because of the various state by state idiosyncrasies associated with laws governing the enforceability of restrictive covenants, it is fundamentally important to familiarise one’s self with the particular state law in the jurisdiction at issue and not simply assume that the “cookie cutter” restrictive covenant will suffice.