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Sir Martin Sorrell: Ramifications of a Breach of his Restrictive Covenants

In April 2018, Sir Martin Sorrell resigned as Chief Executive Officer of WPP Group. This followed more than three decades spent at the helm of the multinational advertising and PR company. It came after WPP’s board commissioned an inquiry into a whistleblower’s allegation. The whistleblower accused Sir Martin of ‘personal misconduct’ and misuse of company assets, which he has denied. In addition, WPP claims he is in breach of restrictive covenants.

Recently, Sir Martin agreed a deal to acquire MediaMonks, a digital production company worth £300 million. According to WPP, this breaches a confidentiality agreement he had with them. In doing so, he is using information gathered when he and WPP were looking at acquiring the business. This was before he resigned and could lead to him losing stock awards worth over £20 million pounds.

This is a timely reminder of the value of confidentiality agreements combined with restrictive covenants. As such, here are some of the key factors to consider:

10 Key Points about Restrictive Covenants

Enforcing Restrictions

1. Don’t start from a false premise – some may consider that post-termination restrictions are unenforceable. However, this is not the case. Generally, restrictive covenants are enforceable provided there is a legitimate and protected business interest. What’s more, it is important that the scope of the restrictions is not too wide as to be unreasonable in achieving that aim.

2. Reasonableness and enforceability depend upon a number of factors. For example, the business interests that are protected, the way the restrictions are drafted and their length, the geographical reach and the employee’s role or seniority.

3. Restrictions apply to the role the employee held when the employer initially applied the restrictive covenants. Although lengthy and onerous restrictions may be reasonable for a senior role, a junior role may be held when leaving the company. Therefore, such restrictions would not be reasonable for the role held when the restrictions were applied. What’s more, they may not be enforceable and so it is important for employers to keep restrictions under review.

Check contracts carefully

4. Beware of off-the-shelf contracts – the wording used in the restrictions should be bespoke to the individual and the company. Additionally, the role performed and the legitimate aim being pursued, although, this is not guaranteed if employers use a template contract. The restrictions may have a deterrent effect. However, they may be meaningless when it comes to enforcing them.

5. Always check share plan rules and other deferred remuneration schemes as post-termination restrictions are found in these too. What’s more, restrictions in these arrangements may be more enforceable than in contracts of employment, even when they are more onerous.

6. Consider post-termination restrictions at the start of your employment relationship, not just the end. The most secure way of understanding your obligations and negotiating these restrictions is to do this at the outset. By the time the employment relationship ends you will already be bound by the restrictions. As such, any actions taken can already be in breach of these. Moreover, if you are seeking to join a competitor, or set up in competition, to be forewarned is to be forearmed.

7. Sometimes employers impose or amend restrictive covenants during the life cycle of an employment relationship. For example, at the point of promotion. Although, employees may overlook this at the joy of receiving a promotion, which comes with a pay rise. However, the pay rise acts as the consideration for entering into post-termination restrictions. Understandably, whilst an employee may wish to forego the perks of the promotion, they should seek advice on the restrictions, especially as they may be negotiable at that point. Importantly, a time to take advice would be before entering into them and accepting the promotion.

Breach of contract

8. Post-termination restrictions are not enforceable if the employer has acted in serious (or ‘repudiatory’) breach of the employment contract. Also, in cases where the employee does not accept the breach. For example, this can occur if the employer fails to pay notice due under the contract of employment. Alternatively, if they act so poorly that they have breached the contract of employment insofar that the employee is entitled to resign and claim constructive unfair dismissal. Consequently, such behaviour can be a get-out clause for the employee of their post-termination restrictions.

9. Employers should consider whether to offer a settlement agreement in cases where senior employees are leaving and there are no restrictive covenants. At that stage they can impose new or improved restrictive covenants. However, in these circumstances the employer will need to offer some form of compensation or incentive for the employee to agree.

10. Be mindful of the implications of being in breach. For example, Sir Martin found this could result in WPP withholding contractual payments and valuable shares, and deferring compensation. Whilst this may not hurt Sir Martin’s pockets, most pockets are not so deep.

BDBF are employment law specialists. If you have any queries about restrictive covenants, please contact Samantha Prosser, Senior Associate via samanthaprosser@bdbf.co.uk or 020 3828 0350.

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Extension of the SMCR: What it means for firms and individuals

The Senior Managers & Certification Regime (the SMCR) was first introduced in the banking sector in March 2016. It was introduced in response to a series of scandals. For example, those relating to LIBOR and FX rigging. Among its aims was to create much greater individual accountability of those working within financial institutions. In our experience, that aim has gone a significant way to being achieved. As a consequence, the impact on the employer/employee relationship in banking has been hard to overstate.

The FCA has announced that it will extend the SMCR beyond banking to the remainder of the financial services sector by 9 December 2019. It will replace the Approved Persons Regime (APER). What’s more, it will replace the Senior Insurance Manager’s Regime at insurance underwriting firms by 10 December 2018.

As it did in banking, the roll out of the SMCR is likely to have a substantial impact on HR processes for regulated firms. In particular, it will materially change the risks for those individuals working in the most senior roles.

Preparations for regulated firms

The SMCR will have an impact at various stages of the employment life cycle. As such, firms affected should begin preparations now to ensure they are ready for the new regime.

For example:

Responsibility under the SMCR

Senior managers will be personally accountable for business failings. Moreover, the FCA requires regulated firms to draw up a ‘responsibilities map’ to make it clear who is responsible for which areas of the business. This is a ‘living document’ which is designed to ensure that there are no gaps in accountability. In preparation for the regime, firms need to be thinking about the current divisions of responsibility and identifying potential gaps in accountability.

Appraisal processes

Previously, under APER, it was the regulator’s responsibility to assess the fitness and propriety of those carrying out controlled functions. However, under the SMCR, the burden falls on firms to assess the fitness and propriety of certified persons (i.e. of all but the most senior staff). This must be done at the point of recruitment and on an annual basis. Therefore, firms will have to build the assessment of fitness and propriety into their annual appraisal processes.

Regulatory references

Hiring firms must obtain regulatory references covering candidates’ fitness and propriety from past employers going back six years. Firms’ references for former employees will need to record any information which goes to their fitness and propriety. However, the scope to negotiate a regulatory reference will be very limited. Firms are likely to take a cautious approach to what they say in it but must also ensure that what they say is fair, accurate and not misleading. Where the circumstances of a negotiated exit are contentious, this career defining tension creates a heightened risk of litigation. It becomes more difficult for the employer and employee to settle their dispute.

Conduct Rules

The FCA’s individual Conduct Rules will apply to the vast majority of staff in firms caught by the extended regime, except for staff in purely administrative roles. Firms will have to ensure that all staff understand their obligations under the Conduct Rules and receive training on them.

The regime will require more discipline on internal audit processes and the ability to demonstrate compliance. Also, Internal HR teams will require training on what will be expected of them for each process that is affected.

What the extended regime will mean for Senior Managers

Internal pressures on audit processes

The SMCR places a duty of responsibility on Senior Mangers for different functions of the firm. For example, if there is a regulatory failing in a Senior Manager’s business area, he or she is responsible. What’s more, they must demonstrate they took reasonable steps to avoid the breach occurring, or they will be personally liable. Given the risk, Senior Managers are likely to place firms under pressure. They will want to ensure internal audit processes are sufficient and compliant with the SMCR.

Remuneration

Holding a Senior Management Function is likely to increase the workload, and will increase risk, for those taking on these positions. This may result in Senior Managers seeking to renegotiate contractual terms. For example, greater remuneration or other protections about the scope of their role. In addition, incoming senior managers may want to understand what their prescribed responsibilities are and may try to limit them contractually. This is a move that most regulated firms will want to resist.

Insurance

Many of those holding statutory directorships will already negotiate the benefit of directors’ and officers’ insurance, as well as other suitable indemnities as part of their contractual terms. Those occupying Senior Management Functions should do likewise.

Handover

It will also be in the interests of all Senior Managers to ensure they receive a thorough handover from their predecessors. They will want to make sure they are alive to the business risks, particularly in the areas of the firm that they are taking personal accountability for. Incoming Senior Managers are likely to want confirmations from their new employer that any handover will be satisfactory.

The SMCR has already had a marked impact on firms’ business practices, particularly on financial services professionals in those parts of the sector where it already applies. Firms are well advised to be thinking now about how they can get ready for compliance.

BDBF are employment law specialists in the insurance and financial services sectors. If you have any queries about how the extension of the SMCR may affect your firm, or you personally, please contact Nick Wilcox, Partner (nickwilcox@bdbf.co.uk). Or Rolleen McDonnell, Senior Associate (rolleenmcdonnell@bdbf.co.uk) on 020 3828 0350.

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Questions about prospective employees’ previous salary are common during financial services firms recruitment processes, but they could be on their way out. Siobhan Riding of Ignites Europe writes that State Street Global Advisors and MFS are closing the door on the practice as part of efforts to reduce the gender pay gap that exists in financial services.

Will other asset managers and financial services firms follow suit?

The thinking behind this is that employers use their knowledge of previous salary and bonus information as a reference point and bargaining chip when making compensation offers to new recruits. But, this can perpetuate the disparity in pay between male and female executive’s earnings. The upshot is that women are likely to be paid a lower starting salary and bonus by their new employer. This could lead to women trying to catch up with their male  peers’ earnings throughout their professional life, and the income disparity following them into retirement.

The ban on asking about previous salaries has been implemented in certain US states such as New York and Massachusetts, but in a bold move, State Street and MFS are voluntarily choosing to extend it across their international businesses in an effort to increase wage transparency and bridge the gender wage gap.

Tom McLaughlin, specialist employment lawyer at BDBF LLP, says banning employers from asking about pay before they make an offer of employment is a way of levelling the playing field. It forces the employer to make an offer on the basis of what it is prepared to pay the individual, rather than what it thinks it needs to pay to entice the individual away from their current job.

There may be more reticence in implementing the ban in European financial services firms or entities. There are stricter compensation rules, whereby firms need to know the detail of previous earnings in order to buy out a bonus or unvested shares.

Tom comments that there are ways around this, as firms could make an offer of employment first, after which point they could offer the buy out.

Tom McLaughlin is a senior associate specialising in advising senior executives and businesses on severance issues for executive and c-suite employees, employee competition, the protection of confidential information and post-termination restrictions.  He regularly advises overseas businesses wishing to establish a market presence in the UK. Tom can be contacted on tommclaughlin@bdbf.co.uk or on 0203 828 0366.

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The EAT has provided a helpful reminder that employers should give proper consideration to all possible alternatives before dismissing an employee for long-term sickness absence. Otherwise, employers may find that the dismissal is not only unfair, but discriminatory.

The Claimant, Dr Ali, had been on long-term sick leave after suffering a heart attack and was regarded as disabled for the purposes of the Equality Act 2010. Medical evidence shared that Dr Ali could return to work on a part-time basis but confirmed that it was unlikely that he would ever be able to work full-time again. Dr Ali was dismissed for capability reasons after the other doctors at his practice failed to consider him returning to work on a part-time basis.

The EAT found for Dr Ali, because there had not been any consideration of the possibility of part-time working.

Ali v Torrosian and others (t/a Bedford Hill Family Practice) UKEAT/0029/18

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Individuals are entitled to a right of access to their personal data. In a situation where that request cannot be complied with without disclosing information relating to another identifiable individual – where it contains ‘mixed data’ – employers  often refuse to comply with the request, unless that other individual has consented to disclosure of their personal information.

The case was concerned with disclosure of an independent expert’s report. The report contained personal data relating to both the patient, P, and his doctor, Dr B. The patient who was the subject of the report sought full disclosure from the General Medical Council (GMC), although the doctor did not consent to the report’s disclosure. On balance, the GMC took the decision that the report contained P’s personal data and should therefore be disclosed to him. The doctor took the matter to the High Court.

The Court of Appeal ordered disclosure of the report. There was no sound basis upon which to favour the rights of Dr B. Ultimately, the data access rights of the patient trumped those of the doctor.

B v General Medical Council [2018] EWCA Civ 1497

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The EAT has given guidance on how an employer should respond to numerous intermittent sickness absences of an employee with a disability.

The employee in this case, Mrs O’Connor, had a high number of sickness absences over a number of years. Her employer initially adopted a very careful approach and treated her with sensitivity by allowing her to have a higher sickness absence record than it would usually allow. However, once Mrs O’Connor’s absence levels hit 60 days in a 12-month period, it issued her with a written warning, the consequence of which was that her contractual sick pay ceased for future absences.

Mrs O’Connor brought a claim for discrimination arising from disability under the Equality Act 2010.

The EAT held that the employer’s decision to issue a warning was not justified, and was therefore discriminatory. Whilst ensuring appropriate attendance levels among staff was a legitimate aim, it was not proportionate of the employer to give Mrs O’Connor a warning. Not only could it not explain how the warning would assist matters, as Mrs O’Connor’s absences were genuine and caused by her disability, but it also failed to follow some of its procedures, such as referring her to occupational health.

DL Insurance Services Ltd v O’Connor UKEAT/0230/17

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The Supreme Court has added to the raft of cases concerning whether staff in the gig economy are workers, and so entitled to paid holiday and limited other rights, or genuinely self-employed and out of employment protection altogether.

This case concerned a plumber working for Pimlico Plumbers, who claimed that the company had deprived him of a number of employment rights such as paid holidays and sick pay because it wrongly classified him as a self-employed contractor. The factors for the Court to consider were:

• that the plumber, Mr Smith, had to drive a Pimlico Plumbers branded van with a tracker in it, had to wear a Pimlico Plumbers branded uniform, and carry a company ID card;
• he was not under a specific obligation to accept work, and Pimlico was not specifically obliged to provide it, but Mr Smith’s contract stated he must work at least 40 hours per week for Pimlico;
• Mr Smith had to provide his own tools and equipment and would not be paid in the event a customer failed to settle an invoice;
• Mr Smith had to secure his own liability insurance;
• he was VAT registered, invoiced Pimlico for his pay, and submitted tax returns to HMRC on the basis of being self-employed;
• there was a contractual right to provide a substitute to carry out the work he had agreed to do, but it was limited only to other plumbers already working for Pimlico; and
• Mr Smith was subject to restrictive covenants under his contract.

The Supreme Court held that Mr Smith was a worker with entitlement to various employment rights. It held that the right to substitute himself for another Pimlico plumber, given that it was fettered, was not enough to prevent there being a personal service relationship – the defining characteristic of worker status. The facts showed that Pimlico had tight control over Mr Smith’s working life, which pointed away from Mr Smith being a truly independent contractor.

This case is the first time a gig economy worker status question has come before the Supreme Court, and its decision that Mr Smith was a worker follows the direction of travel set by other cases. That said, the question of employment status is always tied closely to the facts of any given case, such that it does not automatically follow that other gig economy workers have employment rights. More cases are due to make their way through the courts and tribunals in the coming months.

Pimlico Plumbers Ltd and Mullins v Smith [2018] UKSC 29

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The Employment Appeal Tribunal has held that an employee who was dismissed for failing to provide evidence of his right to work in the UK after his original right to work came to an end should have been given the right to appeal against his dismissal.

The facts of the case concerned Mr Afzal, who had been employed by Domino’s Pizza since 2009. Mr Afzal’s time-limited right to work in the UK was due to expire and he was required to make an application for a right to permanent residence before 12th August 2016. Mr Afzal made his application in time and sent his employer an email attaching evidence of his right to work. However, Domino’s was unable to open the attachment. Concerned about the risk of continuing to employ Mr Afzal, Domino’s dismissed him on 12th August 2016 without any right of appeal.

When Mr Afzal was able to provide evidence of his right to work in the UK, he was given the opportunity to be re-engaged as a new starter (although on inferior terms). He therefore claimed unfair dismissal.

The Employment Tribunal held that refusing Mr Afzal the right to appeal did not make his dismissal unfair, as Domino’s had reasonable grounds to believe that the Claimant had failed to make a valid application. The ET therefore held that Mr Afzal had “nothing to appeal against.”

Mr Afzal appealed to the Employment Appeal Tribunal, who disagreed with the ET’s decision. Mr Afzal had made his application in time. An appeal would have enabled the employer to carry out checks to satisfy themselves that the application had been made in time, and therefore avoid an unnecessary dismissal.

This case therefore highlights the invaluable nature of appeals processes in circumstances such as these and the importance of employers implementing fair procedures when the need to dismiss employees does arise.

Afzal v East London Pizza Ltd t/a Dominos Pizza UKEAT/0265/17

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The Government has published its response to the Women and Equalities Select Committee’s recent report.

In March this year, the House of Commons’ Women and Equalities Select Committee published its report, ‘Fathers and the Workplace’ setting out its recommendations for new legislation to support working parents better. The recommendations included:

• Giving all new fathers their own independent and paid right to leave;
• Making paternity a “day one” right;
• Increasing the statutory rate of paternity pay to 90% of earnings (subject to a cap for higher earners); and
• Offering 12 weeks of “use it or lose it” leave.

In June 2018, the Government published its response. It accepted the need for change but rejected many of the Committee’s recommendations designed to modernise workplace policies. The report concluded:

• The Government was unlikely to follow the recommendation of making paternity leave a day-one right, as it currently is for maternity pay; and
• With regard to Shared Parental Leave, further consultation was needed. The Government stated that it is “committed” to the concept and it has had “little time to bed in.”

In dismissing the Committee’s recommendations, the Government failed to put forward alternative solutions. Maria Miller, Chair of the Committee said, “The Government has previously voiced good intentions when it comes to family friendly policies but the response to our report is a missed opportunity.”

It is therefore clear that further reform of family friendly rights is not on the immediate horizon. The response did, however, comment that the forthcoming Maternity and Paternity Rights Survey this year will provide more data for the Government to consider parental leave in greater detail. The Government’s response can be found here.

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The High Court has confirmed that an entire agreements clause can defeat a claim for misrepresentation.

Shortly after a share sale had taken place, the buyer brought a claim alleging that the seller had misrepresented the company’s liabilities. The share purchase agreement had contained a standard entire agreement clause, saying the agreement replaced any previous discussions and set out the entire agreement between the parties. The High Court held that the parties had intended to exclude misrepresentation claims given how wide the entire agreement clause was (it included contractual matters such as ‘agreements’, ‘warranties’ and ‘promises’, and less contractual matters such as ‘assurances’ and ‘negotiations’). There was also provision for the seller to indemnify the buyer for misrepresentations of the company’s liabilities, so there was already a contractual mechanism by which a matter like this would be resolved.

This decision does not sit well with others on entire agreement clauses and misrepresentation, and it is only a first instance judgment. Moreover, employment contracts do not provide for compensation for misrepresentation and so are arguably not analogous. Nevertheless, whilst this case cannot be relied on as a cast-iron rule, it does act as another reason why employers are well-advised to include entire agreement clauses in their contracts of employment.

NF Football Investments Ltd and another v NFCC Group Holdings Ltd and another [2018] EWHC 1346

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The High Court has clarified the scope of an employer’s duty when giving a reference in respect of a former employee.

The law provides that an employer must exercise reasonable skill and care to provide a reference which is true, accurate and fair. If it fails to do so, then the former employee may have a claim against the ex-employer for negligent misstatement. The High Court has ruled on how far the employer’s duty extends.

This case concerned Mr Hincks, an independent financial advisor, who was employed by CIFS but had authority to conducted FCA-regulated activities as the appointed representative for Sense Network. Following Sense Network’s internal investigation into alleged breaches of its pre-approval processes, it terminated Mr Hincks’ authority on the basis that he had committed repeat breaches and had been “malicious” in doing so. Mr Hincks’ conduct meant that Sense Network had to offer over £12,000 in compensation to its clients. Mr Hincks later sought a reference from Sense Network. The reference provided referred to the allegations, the investigation, the compensation paid to clients, and Sense Network’s conclusion that he had “knowingly and deliberately circumvented” the pre-approval process.

Mr Hincks brought a claim for negligent misstatement, arguing that Sense Network’s reference had not been true and accurate. He said that the investigation had been an “inadequate sham”, and that it had been negligent of Sense Network to report its opinions arising from the investigation without having checked that it had been procedurally fair.

The High Court held that a reference-giver relying on the findings of a previous investigation is not required to review the procedural fairness of that investigation. Instead, the inquiry should be into whether the investigation had a proper and legitimate basis; if it did, reliance upon it was reasonable. A more stringent review may only be appropriate if there was some ‘red flag’ suggesting that something had been amiss with the investigation.

Many employers tend to give factual references, but for those who do not, this case helps to demonstrate what is included within the duty of care they are under. Additionally, where the employer is under regulatory duties to provide particular information to a prospective employer, then it must do so by reference to all information and documentation available to it.

Hincks v Sense Network Ltd [2018] EWHC 533 (QB)

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The EAT has made clear that context is key to the determination of whether conduct amounts to harassment.

Not only does conduct have to be unwanted and humiliating in order to qualify as harassment, but it also has to be related to a protected characteristic. Determining whether that is so cannot be done in the abstract. The EAT in this case held that the Employment Tribunal had been entitled to consider conversations had before the allegedly harassing remark and to reach the conclusion that it had not been related to religion.

The facts of the case illustrate the importance of context. Mr Bakkali was a Muslim and had discussed with a colleague, Mr Cotter, a journalist’s report portraying IS fighters in a positive light. Later that month, Mr Cotter asked Mr Bakkali if he was “still supporting” IS. The Tribunal was satisfied on the facts that the reason Mr Cotter made this remark was the discussion they had previously, not because Mr Bakkali was a Muslim.

The EAT stated that the test for harassment (that the conduct be ‘related to’ the protected characteristic) is broader than the ‘because of’ test in direct discrimination, which warrants a close look at context in order to understand the motivation behind it.

Bakkali v Greater Manchester Buses (South) Ltd (t/a Stage Coach Manchester) UKEAT/1076/17

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