LLPs can require poached staff to serve notice periods, High Court rules

In an increasingly mature and competitive legal market, where clients and high-flying employees are already locked into competitors, growing a team from scratch is extremely difficult - one cannot simply create excellent lawyers with enviable client relationships out of thin air. Therefore, aggressive raids on individuals and indeed entire teams are not uncommon.

What can a law firm do if it finds itself victim of such a raid? It is accepted wisdom that thoughtfully-drafted provisions on notice periods, garden leave, pay and post-termination restrictions are essential. What, however, can a firm do when a departing employee refuses to come into work during his notice period in order to effect a handover of matters and clients? Can the employee force the firm to put him on garden leave? Does the firm still have to pay the individual?

When management is faced with this kind of impasse, thoughts naturally turn to protecting the business' client relationships. How long can the firm keep the employee out of the market for? It is a well-established principle that time spent on garden leave should be credited from the total length of a post-termination restriction. But, what if the firm does not want to pay the employee to sit in the garden and run down the clock on his restrictive covenants and instead wants the benefit of both the notice period and the post-termination restrictions so that there can be at least a reasonable prospect of a successful handover and an opportunity for continuity thereafter?

In a ruling on 29 July 2014, The UK High Court tackled this very issue, which it described as "interesting and difficult" in Sunrise Brokers LLP v Rodgers [2014] EWHC 2633 (QB).

The ruling

The High Court's decision was that, in spite of the employee's refusal to come to work, the employer could keep the contract of employment alive, so as to be able to enforce the employee's obligation not to work for anyone else, while simultaneously refusing to pay the employee any salary on the basis that the employee was not ready and willing to work for the employer.

The case was brought by derivatives broker Sunrise Brokers against its employee Michael Rodgers. In March 2014, Rodgers walked out of Sunrise's London office without notice, having accepted a position with a competing business based in the USA, despite being subject to a notice period and post-termination restrictions.

Sunrise did not accept Rodgers' attempted resignation and instead required him to return to work. Following his refusal to do so, Sunrise ceased to pay his salary. Sunrise sought a declaration that Rodgers was still employed and an injunction which would hold Rodgers to a period of notice and bind him to his restrictive covenants.

The High Court upheld Sunrise's claims for a declaration and injunctive relief. The judge found that a handover, if Rodgers had worked his notice, would have taken between two and six months, and adopted the middle ground of four months, to which he added the six-month period of the restrictive covenants. The judge considered that, in total, Rodgers should be restrained for a 10-month period.

Good news for LLPs

This decision is good news for firms which fall victim to unexpected walkouts: firms cannot be held to ransom by a departing employee or a competitor.

This case highlights the importance of having a plan in place for unexpected walkouts. A firm needs to be clear on how much time it needs to protect its legitimate interests, both in terms of a handover during the notice period and following termination. This approach needs to be echoed in its provisions on notice, garden leave, pay and post-termination restrictions. In addition, these provisions must be robust and resistant to any unexpected departure, whether it is an isolated individual or an orchestrated raid by a competitor.

In particular, managing partners of law firms should consider whether they have sufficiently covered the risk of valuable fee earners departing, especially those who occupy the so-called 'marzipan layer' beneath management. Not only are highly-rated senior associates likely prey for an approach by a competitor, but also salaried partners are targets who, owing to recent changes under the Finance Bill 2014, may have resigned their LLP member status for one of employment.

Having solid contractual foundations in place is only one part of a firm's essential weaponry. In these situations, strategy is key. Had Sunrise accepted Rodgers' walkout and refusal to return as a repudiatory breach of contract by dismissing him, then it would have only been able to seek to rely on the restrictive covenants, which, as in most cases, offered less protection to the business than the obligations on Rodgers during his notice period did. An employer's response to any sudden walkout or resignation must be carefully considered.

David Greenhalgh is founding partner at Twenty Twenty Law (www.twentytwentylaw.co.uk), which acted for Sunrise Brokers LLP in the High Court