Know the perils of poaching

Kathleen Brooks
ANYBODY working in a client-facing business and thinking of starting their own firm has to be aware of the legal tangle surrounding “poaching” your former clients.

What is allowed all hinges on the contract you signed with your former employer. If you have a contract with “restrictive covenants” then you need to tread carefully. A restrictive covenant, in essence, protects the employer’s client base if an employee leaves the firm and sets up a business in competition to it.

There are two forms of restrictive covenant that can be included in a contract. The first is a legal obligation not to solicit your former employer’s clients for deals or business, the second restricts you from doing business with a former client even if they approach you.

These covenants usually last for a period of six to twelve months, says Matthew Whelan, an employment lawyer with law firm Speechly Bircham. He also says that if they are ignored they can destroy a start-up: “You need to check your contract otherwise a viable business plan, but one that depends on business from your old clients may no longer be viable,” he says.

Breaking your contract can also be costly, as your former employer has the right to take you to court. If found guilty the consequences include damages paid to the employer for loss of business; an injunction against you that means you must immediately stop doing any further business in breach of these covenants; and paying your former employer’s legal fees.

“People shouldn’t be quick to ignore the restrictive covenants in their contracts,” says Martin Brewer a partner at law firm Mills & Reeve. However, the law has been designed so that it is not overly prohibitive for people to leave a firm and break out on their own.

Martin Brewer points out that covenants written into contracts can be “adequate but not more than adequate.” For example: If you work for a large hedge fund and you only manage 20 per cent of the firm’s client base, then the covenants only apply to the clients that you worked with, leaving you free to do business with the other 80 per cent.