MANAGEMENT: Breaking free from the firm

Starting up on one's own is the dream of many a professional, but what happens when they take colleagues and clients with them? Hannah Marriott looks at the role of the restrictive covenant.

Starting a PR agency is a difficult business. But while finding the right premises, hiring good staff and building a reputation are all pressing concerns, new agency bosses must also worry about restrictive covenants.

This is the rather stern name for the agreement made between consultants keen to set up on their own and their former employer. Its primary function is to stop them subsequently poaching clients and staff.

No dealings
Most restrictive covenants decree that staff cannot solicit or deal with their former employer's clients and staff for 12 months.

As active 'solicitation' is so difficult to prove, lawyers would recommend having a 'non-dealing' clause instead. This means that - regardless of who approached whom - new start-ups cannot actually work with former staff or clients during this period.

They also tend to include a non-compete clause for six or 12 months, preventing ex-employees from directly competing or working for a competitor. And they are likely to contain stipulations about gardening leave and confidentiality.

People power
This is a contentious issue for the PR industry. Accounts are often hinged around one particular person. Contacts and personal relationships are extremely important, as are ideas and 'creative sparkle'.

That said, many PROs feel that most restrictive covenants are fair, even morally necessary. But some insist otherwise (see case studies).

One anonymous agency founder tells of frustrations at having to sign an 18-month covenant, and still being unable to take over one particular account 'that I and I alone had made what it is today', despite the client having dropped the previous agency several months ago.

'I feel that restrictive covenants are put in place to make the agency you are leaving feel better about itself. If clients know they got a good service from one or two people at an agency and then those people leave, they should be within their rights to look again at the contract and the offering,' she adds.

Although this particular PRO has decided to honour the covenant, many do not. But there is much disagreement about whether or not they are actually enforceable. The only place to really enforce them is in court, but this is always going to cost at least £50,000. Even lawyers agree that this is money that would be better spent keeping staff happy in the first place.

Greg Campbell, partner at law firm Mishcon de Reya, says the only time such expensive action is worth taking is when the actions of one individual risk wrecking the business as whole.

If other staff are considering following suit, for instance, a show of strength will make it clear that the agency's top brass take a dim view of accounts being taken from under their noses.

Unity MD Gerry Hopkinson says companies often find it hard to prove their case because English law 'tends to favour the employee', owing to the belief that we all have the right to earn a wage.

Hopkinson left Band & Brown in 2004, after the company was bought by Canadian marcoms group Cossette Communications. As he was a minority shareholder, he was issued with a three-year covenant, which he felt was enforceable.

'The courts are more likely to rule in the favour of the company if a transaction has taken place,' he explains.

There is some consensus that these covenants have to be 'reasonable' - although, as ever in the law, the definition of 'reasonable' is hardly clear-cut.

Yet covenants can still be useful as tools for private negotiations. According to lawyers, restrictive covenants should never be neglected from employment contracts.

While enforcing them fully can be prohibitively expensive and time-consuming, covenants can always be used as a 'tool' and provide the basis for negotiations, says Mishcon de Reya partner Greg Campbell.

'An employer could say that they won't hold the employee to the full 12-month covenant, but if they agree not to work for the client for six months then they will not be sued. Covenants help to set the parameters,' he says.

Up to date
They should also be carefully worded and frequently revised, says Dechert partner Charles Wynn-Evans.

'Agencies really need to be up to date where employment contracts are concerned. If contracts are ten or 15 years old then legal developments and case law could leave them unenforceable,' cautions Wynn-Evans. Similarly, employers must update contracts as employees rise up the ranks, or risk an employee leaving a senior post without even having to take gardening leave.

Recent revisions to TUPE, or Transfer of Undertakings (Protection of Employment), laws have made the situation even more complicated.

Since 2006, if agency staff dedicate their time to one account, they may be forced to follow the client and join a new agency if the account changes hands.

Although this is yet unproven, Wynn-Evans says that, in theory, restrictive covenants could be bypassed and TUPE could be used to 'lift out entire teams to agencies awarded the new account'.

That said, if this course of action was proven to be 'plotted' by a member of staff from an agency, in conjunction with a client, they could almost definitely be sued.

As for those leaving agencies, being open and honest is key.

The worst thing to do is to be caught plotting behind the scenes to solicit either staff or clients.

As ever, the best cure is prevention. In legal terms this means having a sturdy employment contract in place, which could take a few thousand pounds to draw up, but will be worth its weight in gold if there is a problem further down the line.

Team effort
Moreover, in agency management terms, agencies should always avoid being structured in such a way that one person has complete control over one account.

And, ideally, openness and honesty should see many agencies being pragmatic and solving disputes themselves (see case studies).

Indeed, the very existence of restrictive covenants is seen as 'symptomatic of the lack of trust and interaction among PR agencies in general', according to Fourth Day co-founder Nikki Scrivener.

'If as an industry we spent more time working together for the good of the industry and our clients and less time worrying what our competitors are up to, we could invest more in developing and retaining our staff and less in unnecessary legal wranglings,' she adds.

Indeed, boasting about bringing new business to a new agency can put employers off.

James Farquharson - senior account manager at Oxfordshire-based Goode PR - says when recruiting, 'alarm bells ring as soon as a candidate says they can bring clients from their present agency'.

'We hire people on their skills, not on what business they can bring with them. If they are prepared to do this to their current employer, they will almost certainly do the same to us,' he maintains.

One thing is for sure: agency leavers should treat their bosses as they would expect to be treated by future staff. Because in agency life, what goes around comes around.

VIEWPOINT: 'Restrictive covenants must be enforceable'
Deborah Lewis, MD, Mandate Communications (Republic PR merged with AS Biss at the end of last year to form Mandate)

'Restrictive covenants are important and must be enforceable. Every agency start-up becomes a seed bed for entrepreneurs, so the very same people who may think it is fine to poach clients need to consider their reaction if someone were to try to break the covenant with them in the future.

Deborah LewisPragmatism is crucial, however. The costs of enforcing a restrictive covenant can be very high if both or either parties are not prepared to be open about how they approach the issue.

For example, when Jane Howard and I set up Republic, we were allowed to 'walk away' with an £18,000 per month account because we were intrinsically linked to it. It was PR for a very complex legal case, and the client requested it. The client was shared with several other agencies in our group and they made it clear that they would take a dim view of the wider accounts if they weren't listened to.

More recently, when an employee of Republic left we found we were able to reallocate every account apart from one, a £20,000 a year client, with whom she had worked closely and nurtured a strong relationship. We took the view that it made sense for her to continue working with them in her new set-up.'

VIEWPOINT: 'Legal strong-arming won't work'
Sarah Lafferty (nee Sherman), MD Europe, The Hoffman Agency

'In my past two agency roles, when I was an associate director, my contract stated that if I were to move on to any type of employment situation (not just to set up alone), I would be restricted from approaching agency staff for a period of up to a year. In both cases I honoured these covenants. But previous members of my teams still approached me. So I hired some of them.

Sarah LaffertyEmployers that use legal strong-arming to retain unhappy staff members are tackling the wrong side of the problem. I have never seen that approach work or serve as a deterrent. I don't think it is really possible to enforce these covenants because it is nearly impossible to prove that an employee has been "poached" if they are eager to move on.

Ironically, in my current role - my most senior yet - I have no such restrictive covenants in my contract. It is also the best place I've ever worked.

Some of my colleagues have been here for more than 10 years so retention is most definitely not an issue that requires legal reinforcement. People want to stay. A healthy agency creates the kind of positive working environment that inherently inspires loyalty.

I would now treat any potential employer that asked me to sign my life away to a lot of restrictive legal covenants with suspicion. Agencies should be thinking of creative ways of retaining staff - not legal ones.

In our client contracts, however, clients agree that if they "poach" a member of staff they will have to pay a 35 per cent recruitment fee to the agency. Given the high cost of recruitment, that seems fair enough.'

VIEWPOINT: 'If staff and clients want to leave, they will'
Nick Band, chairman, Band & Brown

'Restrictive covenants do scare off some people, but generally they are not worth the paper they're written on. If staff and clients want to leave, they will go.

Nick BandI see it from both sides. I left the Quentin Bell Organisation in 1991 under a covenant, which I ignored. The very irate founder biked over a few solicitor's letters, which I threw in the bin.

Since then I have faced a few examples myself.

When two of my staff set up an agency, I chased them and spent £9,000 on solicitors' letters. Those bastards owe me £9,000!

I've since let it go and now we're friends. It is not worth it - it is too expensive and time-consuming. The only winners were the lawyers. One other member of staff left and poached staff, and we sent blustering letters accusing him of doing as much, but again there's no real point.

In reality, the hoops you have to jump through to actually prove a case are ridiculous.

We all know what really goes on in the industry. When you have that start-up fire in your belly, nothing is really going to stop you.'

VIEWPOINT: 'No single person is bigger than the team'
Susanna Simpson, MD, Limelight Public Relations

'I was working for Eulogy before setting up on my own, and I had restrictions on taking staff, clients, prospective clients and even suppliers written into my contract. For 12 months, I couldn't go near any of them.

Six years on, I still haven't taken any people or clients from my former employer. Indeed, I would find it morally and ethically wrong to do so.

Susanna SimpsonAt my last agency I had a great boss who taught me a lot. I wouldn't be able to run the company I have now if it wasn't for my experience there. I have the same conditions written into my own employees' contracts.

We had a situation at Limelight when one of our staff left us to work in-house for one of our clients, meaning I lost the employee, and I lost the account.

This was against the terms of both the client and the employee's contracts. I wrote to the client myself, reminding them of this, and I asked them for a fee to stop us from taking legal action. We got a big payment out of the client.

It was a horrible situation at the time, but a year later the client got rid of the employee and came back and begged for forgiveness. They realised that no single person is bigger than the team at a company. Behind the scenes at an agency there is a lot going on - it's not all about the person leading the account. You can get amazing results from an account executive.

We accepted their apologies and that company is now a client once more.'

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