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MediaMonks and WPP- an Opportune Time to Revisit Restrictive Covenants

06/07/2018 | Noel Deans & Sean Field-Walton
On 4 and 5 July 2017 the City AM and other outlets have reported on WPP and Sir Martin Sorrell’s likely upcoming battle over confidentiality and competition. Having exited WPP, the advertising and

On 4 and 5 July 2017 the City AM[1] and other outlets have reported on WPP and Sir Martin Sorrell’s likely upcoming battle over confidentiality and competition. Having exited WPP, the advertising and media goliath that he led as Chairman and Chief Executive Officer on less than good terms, Sorrell swiftly founded a new company called S4 Capital. Days after S4 Capital made a bid for a Netherlands based company called MediaMonks it transpires that WPP had shortly before made their own bid for the same outfit.

As reported by the City AM “[t]he corporate clash is expected to raise questions about WPP’s decision not to make Sorrell sign a non-compete clause preventing him from being involved in any rival marketing ventures after he resigned”.  As such, now is an opportune time to consider our and our clients’ approach to the incorporation of restrictive covenants in employment contracts of staff of all levels, but particularly senior executives.

The basic position

The oft forgotten starting point when considering the terms of restrictive covenants contained within employment contracts is that restrictions must protect the legitimate business interests of the employer.  A failure to closely align the terms of any restriction with this requirement creates a risk of unenforceability. Seeking an answer to what is a legitimate business interest is not a science. It is a question which must always be considered in light of the facts for each individual case.  This will mean taking into account the nature of the employer’s business and the role of the employee in the employer’s business.  Of particular importance is the employer’s likely exposure to confidential client information and/or client relationships or other matters which may give that employee some sway over the goodwill of the employer.  In practice, we are frequently instructed on matters where an employer has not taken due care to tailor restrictive covenants to an individual employee’s circumstances. We suspect that the reader will also be familiar with employers rolling out standard form restrictive covenants across the workforce with little delineation between categories of employee.

Exposures

To be frank, it is rare to encounter an employer who has nothing to worry about when it comes to the restrictive covenants they apply to their workforce. We frequently find ourselves advising on methods to reduce the potential unenforceability exposures we identify.

An inbuilt protection against these exposures is that, in many cases, an employer benefits from their workforce’s inability to judge the enforceability of restrictive covenants for themselves. Some employers benefit from the deterrent effect of including restrictive covenants which are known to be unenforceable owing to the fact that many people do not understand the detail of the rules for determining the enforceability of such terms.

But what can a client do when faced by a sophisticated employee who is more attuned to these issues?  In short, if a restrictive covenant has been included in a contract which is so broad or endures for so long that it does not reflect the realities of the employee’s position there is little for an employer to do besides engage in some posturing which more often than not would include the threat of issuing High Court injunctive proceedings.

At this point, it is again worth emphasising that the enforceability of a restrictive covenant is judged by reference to the point that it was entered into. Clients can be surprised to hear them that a restrictive covenant which would be enforceable if the employee agreed to enter into it now is nonetheless unenforceable because the restrictive covenants were not appropriate when they were entered into. The normal position is that even if an employee’s responsibilities and role enlarge despite not being issued a new employment contract, this development will not operate to make initially unenforceable restrictive covenants enforceable. Note, however, that there are certain limited exceptions to this rule.

Senior staff exits

When dealing with exit negotiations in relation to senior and executive staff like Sorrell, there is often an emphasis on sensitivity and a desire to preserve goodwill. Having regard to such factors is not misplaced; however, the board and/or those in a position to negotiate the terms of an exit including ongoing restrictive covenants must remind themselves of their overriding fiduciary (and sometimes statutory) duties.  These duties require those bound by them to act in the employer’s, not the employee’s best interest.

Perhaps it was a failure to appreciate this which has resulted in WPP and its eponymous former leader being pitted against one another. It is certainly unusual for a senior executive of Sorrell’s pedigree to have unrestrained freedom to act in ways that directly compete with the business of their former employer.

That WPP have ended up in this position is surprising. The apparent absence of a non-competition restrictive covenant in his employment contract/service agreement may be an oversight. What is doubly intriguing is that WPP appear to have missed the opportunity to include the same in any settlement agreement which may have been signed as part of the exit process.

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

[1] Issues 3,158 and 3,159

Employment Tribunals – Fees, Costs and Frivolous Claims

31/05/2018 | Noel Deans & Sean Field-Walton
Background and Cost Orders It is old news that in R (on the application of UNISON) v Lord Chancellor the Supreme Court held that the regime of case filing fees for claims brought in the Employment

Background and Cost Orders

It is old news that in R (on the application of UNISON) v Lord Chancellor [2017] the Supreme Court held that the regime of case filing fees for claims brought in the Employment Tribunal was unconstitutional. Generally, comment has regarded this as a success for access to justice.

Employees with meritocratic claims should not be deterred from bringing them because of a fee structure like that which has now been overhauled and which required upfront payments of (generally) between £390 and £1,200. Nonetheless, employees should not be provided with an incentive to bring frivolous claims and to “bet the company” in the hope of receiving an undeserved pay-out.  Regretfully, this is arguably the current reality.

An up front fee regime was always inappropriate and statistics released since the Supreme Court’s decision in 2017 do suggest the fees as they were applied were a barrier to access to justice for individual claimants. However, we frequently act for employers and have seen that the tools available to them to fend off entirely false and opportunistic claims are inadequate.

Options when faced with a frivolous claim

1) Costs Orders

The successful party to proceedings before the Employment Tribunal does not have an automatic right to recover their legal costs from the unsuccessful party as they do in the civil courts. This is often surprising to those of our clients who have not been involved in Employment Tribunal proceedings before. A party may apply for a costs order where the unsuccessful party’s conduct has been unreasonable. This would include pursuing a baseless claim. Sadly, Employment Tribunal judges consistently demonstrate a reluctance to make such orders and when they do their scopes varies quite unpredictably between roughly 20-80% of the costs incurred.

2) Strike Out Applications

A party to proceedings may apply to strike out the other party’s case on a number of grounds. These grounds are set out in Rule 37(1) of the Employment Tribunal Rules of Procedure 2013 (as amended) (the “Procedure Rules”). The most common grounds relied on are that the claim has no reasonable prospect of success and/or that the claim or response is scandalous or vexatious. Just as is the case regarding applications for costs orders set out above strike out applications are rarely successful. This is even more so when the claim includes whistleblowing or discrimination elements because it is established law that in such cases the Employment Tribunal should be extremely slow to award a strike out.

3) Deposit Orders

Another option for a party to proceedings is to apply for a deposit order under Rule 39(1) of the Procedure Rules. These are granted more often than cost orders or strikes outs by Employment Judges but cannot be considered frequent. Furthermore, albeit the award may signal an Employment Judge’s lack of confidence in a claim, the effectiveness of deposit orders are hamstrung by the £1,000 limit on what an Employment Judge can order is paid into the Employment Tribunal.

Meaning for employer respondents

In our experience, the combination of the above often leaves employers in a difficult position. Given the unlikelihood of recovering their costs or successfully striking out a claim an employer is faced with the prospect of incurring significant legal fees (particularly during the disclosure process). In light of this, it is easy to see why an employer may consider that it is best to cut their losses and offer a pay-out even where they know the claims levelled against them to be falsified.

It is certainly correct to recognise the asymmetrical power structures between employers and employees.  However, perhaps it is time to rethink the infrastructure of Employment Tribunals to ensure that employers too are also provided with access to justice and not encouraged to settle false claims. A system which can easily be used to strong-arm employers into making unjustified pay-outs surely cannot be desirable from a legal or policy perspective.

Moving forward

Our view is that the Supreme Court’s decision was correct. However, without encouraging Employment Judges to utilise the powers available to them to dissuade litigants from putting employers to costs in the hope of extracting a pay-out the system does seem loaded in favour of potential opportunist claimants. This is no fault of the Supreme Court’s. It is not their duty to legislate for a supplementary structure following their effective abolition of Employment Tribunal filing fees. Instead, we suggest that in light of the Supreme Court’s decision Parliament should consult on the issues set out in this bulletin. Our expectation is that our observations would be shared.

It may be time to reconsider the position that the unsuccessful party does not have to meet any of the successful party’s costs unless the successful party makes a successful costs application. Perhaps any such rule will need to be a diluted version of the same rule in the civil courts.  Maybe this could be in a rule that costs will follow the claim in an amount that the Employment Judge considers just having regard to all the facts of the case, including the strength of the evidence.

One way or another, the Employment Tribunal system and the practices within it may benefit from a recalibration so that access to justice is preserved for both the employee and the employer.

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

Wrotham Park no more – moving forward with negotiating damages

03/05/2018 | Noel Deans & Sean Field-Walton
Morris-Garner and another (Appellants) v One Step (Support) Ltd (Respondent) UKSC 20 In Morris-Garner the Supreme Court had the opportunity to consider damages awards for breach of contract based o

Morris-Garner and another (Appellants) v One Step (Support) Ltd (Respondent) [2018] UKSC 20

In Morris-Garner the Supreme Court had the opportunity to consider damages awards for breach of contract based on the price that would have been hypothetically negotiated for releasing the restrictive term. It follows that from handing down of the judgment on 18 April 2018, Morris-Garner is now the leading case on the matter and should be a point of reference for practitioners and employers alike.

Background and Wrotham Park

The remedy for breach of contract is often given little more explanation than the often repeated phrase: “the measure of damages for breach of contract is to put the innocent party in the position that they would have been in had the contract been performed”. Damages are usually awarded in circumstances where a party can be considered to have suffered some financial loss through breach or non-performance of a contractual term. As such, they are usually considered compensatory. Nonetheless, in some cases, including those where enforcement is sought for breaches of restrictive covenants contained in employment contracts, injunctive proceedings in the High Court are another source of recourse.

There are, however, other scenarios where there is no clear economic loss suffered and an injunctive remedy is considered inappropriate. Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] was one such case. In Wrotham Park, a plot of land was sold subject to restrictive covenants on the development of a portion of that land. Ultimately, that land was transferred to a property developer who was not aware of the said restrictions. The developer proceeded to develop the land in breach of that restriction.

Despite being aware of plans to develop the land and a grant of planning permission, the party holding the right to enforce that restrictive covenant only made their objection known when they applied for an interim injunction against the developers. This was after the development had begun. Albeit the injunction was sought at an early stage of the development, Brightman J decided that although the claimant would ordinarily be entitled to an injunction it should be rejected as a matter of discretion. The state of law at the time suggested that no or nominal damages should be awarded as the claimant had suffered no financial damage from the breach of contract. Nevertheless, the claimant was awarded a sum equal to that which the Court considered they would have received on a negotiated release of the restrictive covenant; 5% of the developer’s anticipated profit. The award of damages on the basis of a hypothetical negotiation has until this point tended to be referred to as “Wrotham Park” damages. In Morris-Garner, the Supreme Court said that they prefer to call these “negotiating damages” and therefore we adopt this terminology for the purposes of this article.

The facts of Morris-Garner

Morris-Garner involved a joint venture between two defendants and the claimant. The joint venture provided rented accommodation and support services to enable vulnerable individuals referred by local authorities to live as independently as possible. In 2006, the first defendant transferred her 50% shareholding to the claimant in return for £3.15 million. The first defendant was subjected to confidentiality, non-solicitation and non-competition covenants running for three years. Within the restricted period and in breach of those restrictive covenants the first and second defendant founded and operated a business in competition with that of the claimant. In the words of Lord Reed who delivered the leading judgement on behalf of the Supreme Court in this case:

“[the claimant] sought an account of profits, or alternatively what were described as restitutionary damages, in such sum as it might reasonably have demanded as a quid pro quo for releasing the defendants from those covenants, or, in a further alternative, what were described as compensatory damages for the loss it had suffered by reason of the defendants’ breach of those covenants.”

                                                                                             Emphasis added.

The first instance judge applied Wrotham Park by saying that the claimant could elect to either receive negotiating damages calculated as the fee the defendants would have had to pay to be released from their obligation, or alternatively compensatory damages in the form of lost profits or possibly goodwill. At the Court of Appeal, this decision was upheld. That Court considered the test for whether negotiating damages could be awarded was whether an award of damages on that basis was a just response in the particular case which was a matter for the judge to decide on a broad brush basis.  The Supreme Court ruled that both the first instance judge and the Court of Appeal had taken an approach that could not be considered to be correct. The salient areas of the judgment in Morris-Garner are set out below.

A theoretical objection?

At paragraph 91 Lord Reed dealt with what some had argued was a bar to the award of damages on a negotiated damages basis, namely that “[t]he use of an imaginary negotiation can give the impression that negotiation damages are fundamentally incompatible with the compensatory purpose of an award of contractual damages”. He did so by stressing that the relevant contractual right should be conceptualised as an asset and an economic value being given to the fact that a party had been deprived of it.

Understanding contractual rights as assets

He also accepted at paragraph 95(9) that the normal inference “[w]here the claimant’s interest in the performance of a contract is purely economic, and he cannot establish that any economic loss has resulted from its breach” would be that they have suffered no loss and in that event, they could not be awarded more than nominal damages. However, he goes on to explain at paragraph 95(10) that “negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset”. The hypothetical negotiating is only a means of reaching a value.

No right to elect how damages are assessed

In rejecting the approach taken by both the judge at the first instance and by the Court of Appeal, Lord Reed at paragraph 96 clarified that no claimant is entitled to elect how their damages are assessed. Part of this confusion may have been caused by a misunderstanding of the previous cases which could be seen as treating Wrotham Park assessments as some entirely separate means of assessing damages. Shutting down this view, Lord Reed emphasised that using an imaginary negotiation is “merely a tool” for assessing the value of a financial loss.

Concluding thoughts

Morris-Garner has been remitted to the lower courts for the Court to consider the financial loss and/or loss of goodwill which the claimant has actually sustained.

Claimants should be encouraged in that the Supreme Court has clearly enunciated that an inability to show clear financial loss is not necessarily the be all and end when seeking a damages award for breach for contract.

By providing authoritative clarification on an area of law with confused reasoning, Morris-Garner has narrowed the scope for seeking negotiating damages. The Supreme Court is clear that the ordinary inference if no clear loss can be proven is that no or nominal damages should be awarded.

Nonetheless, claimants should fully explore recovering damages on a negotiated damages basis where they cannot easily identify a financial loss but can put an objective economic value to a benefit protected by the contractual term that has been infringed.

Negotiating damages are not understood as a departure from ordinary compensatory damages. They are ordinary damages awarded following the use of a hypothetical negotiation used to assist a judge in calculating the economic value of an asset or a right that is taken or infringed through breach of a contractual term.

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

Incoming costs for employers – 6 April 2018 and beyond

26/02/2018 | Noel Deans & Sean Field-Walton
The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below

The new financial year will bring with it several areas of increased cost for employers. We set out a number of key changes relating to termination payments which employers need to be aware of, below.

Payments In Lieu of Notice (a “PILON”)

Whether a PILON is subject to tax and NIC currently depends on the terms of an employee’s contract. If there is a contractual right to make a PILON, any such payment is usually treated as taxable earnings and subject to income tax and NIC. Contrastingly, non-contractual PILONs benefit from a £30,000 tax exemption derived from the current section 403(1) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”).

From 6 April 2018 this position is changing. Through the insertion of new sections 402A – 402D to ITEPA employers will now be required to calculate the employee’s total basic pay including in respect of notice (whether or not served), and deduct from that sum income tax and both class 1 and 2 NIC. This means that both contractual and non-contractual PILONs will be subject to the usual tax and NIC deductions. HMRC have however confirmed that this change will not be retrospective.

Tax exemption for payments in respect of injured feelings?

Remaining unchanged despite the Government’s updates to the termination payments regime, is section 406B of ITEPA’s general exemption from tax for payments in respect of “injury to, or disability of, an employee”.

Nonetheless, through the insertion of new section 404B(7) to ITEPA payments by employers in respect of mere injury to feelings will not benefit from this tax exemption from 6 April 2018. Although employers will see this as another source of increased expense this change incorporates what has been the case law position since K Moorthy v HMRC [2016] which ended this debate and held that a payment in respect of injured feelings was taxable.

Mounting auto-enrolment obligations

From 6 April 2018, the mandatory contributions to be made by both employee and employer in respect of the auto-enrolment scheme will begin to increase.

The minimum employee contribution will rise from 1% to 3% and the corresponding minimum employer contribution will rise to 2%. These figures will further increase to 5% and 3% respectively from 6 April 2019.

Much commentary has focused on the potential increased cost to employers of complying with their auto-enrolment obligations. We agree that employers are likely to see balance sheets dented more by pension liabilities than at present, but this impact may be softer than anticipated. This is owing to current inflationary pressures which we expect to lead to an increasing number of employees choosing to opt out.

Foreign Service Relief (“FSR”)

6 April 2018 also sees an end to the application of FSR in relation to termination payments made to employees who had worked overseas but received a termination payment during a tax year when they were resident in the UK.  This is despite some trepidation displayed from influential lobbies, including but not limited to the Chartered Institute of Taxation.[1]

As currently drafted, even where an employee (except if exempted) has served the majority of their employment abroad but receive a termination payment during a tax year when they are resident in the UK no FSR would apply and the total sum would be treated as taxable earnings and subject to tax and NIC. Here we see the potential for significant and unexpected liabilities to occur. As a result, it is possible that employers may be expected to increase or “gross up” termination payments to employees now tax resident in the UK but who have previously worked overseas.

Concluding Thoughts

Employers considering dismissals may wish to expedite these processes especially if they want to offer a tax free inducement as a settlement term.

Potential increased tax liabilities for employers may ultimately be minimal. Yet, given the financial and reputational cost of a dispute with HMRC for contravention of these provisions would probably be significantly more costly, employers should actively take steps to prepare for implementation. This should include making sure that the internal payroll and HR functions are fully abreast and trained in respect of these changes.

The proposed changes to FSR in 2019 are an area we will be proactively monitoring. If the Government does not amend the draft legislation as it relates to FSR, employers, particularly those with an international base will need to plan their human resources and dismissal considerations more carefully to avoid unexpected liabilities falling due.

[1] Termination payments: removal of Foreign Service Relief (FSR) for UK Residents Response by the Chartered Institute of Taxation, 25 October 2017

Our employment department has experience and expertise in all of the above areas.

 If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

Update on Taylor Review and Employee Status in 2018

12/02/2018 | Noel Deans & Sean Field-Walton
In 2017, the “gig economy” evolved into more than a mere buzzword. Numerous discussions and several legal cases grappled with worker status generally and across various contexts which is indicati

In 2017, the “gig economy” evolved into more than a mere buzzword. Numerous discussions and several legal cases grappled with worker status generally and across various contexts which is indicative of the lack of clarity in the area. As it stands, determining employee status turns on questions of mutuality of obligation, personal service and control. All of these, unsurprisingly, have their own epilogue of related case law attempting to reach an understanding of what exactly each of those phrases means for businesses and employees.

Significant decisions in the area have seen what may on the face of it be divergent outcomes. Uber drivers have been held to be “workers” under the Employment Rights Act 1996 (the “ERA”), Deliveroo drivers were considered not to be “workers” for the purposes of a Union’s application for compulsory recognition under Schedule A1 of the Trade Union and Labour Relations (Consolidation) Act 1992 (the “TULRC”) and plumbers have been held to be “workers” for the purposes of the ERA and the Working Time Regulations 1998 as well as an employee within the extended meaning of that term in the Equality Act 2010. Other decisions such as King v Sash Window Workshop Ltd and another have extended, or arguably just confirmed how existing rights apply. In this case, Mr King’s contract described itself as a “self-employed commission-only contract”. Under that contract, Mr King was paid on a commission-only basis. The Court of Justice of the European Union held that Mr King, despite having been described as self-employed and led to believe he could not take paid leave was actually a “worker” and was therefore entitled to carry over or be paid for the entire sum of that unpaid holiday. This clarified that the right to carry over is not only limited to cases involving sickness or maternity leave. Taken together with the decisions conferring “worker” status on new sections of workers, potentially large retrospective liabilities could be created and businesses may be concerned to understand what are their actual and/or likely exposures are.

As such, it is with perhaps renewed force that we can reflect on the Taylor Review of Modern Working Practices (the “Taylor Review”) published in 2017 and one of its central recommendations which was to codify the case law principles governing “employee” status into primary legislation.

On 7 February 2018 the Government published their response to the Taylor Review which acknowledged the lack of clarity and certainty over employment status (the “Response”). Therefore, this is an area we will closely monitor as 2018 develops.

One thing is for certain; the prevailing wind is in favour of extending or granting new rights to workers who previously would have been considered “casual”. Albeit they may seem minor adjustments, simple proposals accepted by the Response that would among other things oblige employers to provide written particulars and payslips to workers, are new compliance burdens should not be underestimated. Seeing as the general thrust for recognition of workers’ rights seems only to be increasing this may be an area where companies, especially those offering shares on public markets, should be particularly attuned to the risk of reputational damage and consider seeking specialist legal advice in this regard.

Employers may be relieved, however, that in the Response the Government has confirmed it will not (at least for now) be reversing the burden of proof where employment status is in dispute. It will remain the employee’s duty to prove their alleged status. Similarly, the Government has confirmed that despite some rumbles in the area of non-compete restrictions it does not propose to take any action in this area seeing as such restrictions were considered valuable by most respondents to consultations.

Seeing as the advent of both the GDPR and implementation of the extended Senior Managers & Certification Regime are not far off the horizon and given the ripeness and appetite for change in the area of employment status businesses may be prudent to seek specialist legal advice in these areas.

Our employment department has experience and expertise in all of the above areas.

If you would like any further information, please contact Noel Deans at noeld@rosenblatt-law.co.uk or on 0207 955 1413.

This article should not be taken as definitive legal advice on any of the subject matter covered. If you do require legal advice, please contact Rosenblatt as above.

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