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Jumping Ship in Recruitment – an issue of restraint

By June 3, 2010 No Comments

This week saw Hudson’s freshly acquired IT recruitment team officially commence in their new roles in the Auckland office, following their high profile and heavily gossiped move from a large competitor down the road.  Following a recent HRINZ seminar on “Protecting Your Business in a Competitive Environment” I feel it could be good timing to share with you, my fellow recruiters, some information on those Restraint of Trade clauses in your employment agreements so you can better understand your limits, obligations and boundaries that you need to remain within when you jump ship.

This is not a lone occurrence and there will be a lot more of this kind of activity to come.  Last year was bloody hard work for those of us that remained recruiting and there is a great deal of disenchantment out there.  Recruiters have seen their colleagues retrenched, their salaries cut, their commissions decreased, and the level of performance management ratcheted up several notches.  Strong leadership, clear vision, a feeling of fairness and just reward for all the hard work are good talent management tools and can prevent churn.  But as the market gets tighter again, and good recruiters are presented with increasingly more opportunities, the ones still feeling undervalued are now finding the decision to look for a new desk in a new home is an easier and safer one to make.

I should point out that most of this information comes from the presentation by the law firm Minter Ellison Rudd Watts and it is not offered as legal advice from Rice Consulting.  Don’t rely on this in court, but use it as a point of reference and guidance in your decision making when considering moving to a competitor.

There are three types of Restraint of Trade:

  • Non-Competition – this prevents a recruiter going off to work for the competition, or entering into competition with their old employer, which in our industry means pretty much any other recruitment firm.  This is the hardest type to enforce because it is against public policy to prevent someone from actually working, and you will rarely find one of these clauses in a recruitment contract.
  • Non-Dealing – this prevents a recruiter from dealing with the clients they dealt with at their previous firm.  Again, this is a tough one to enforce, unless the previous firm has a signed exclusive agreement with the particular clients in question, especially if the new firm already has a relationship with the same client anyway.
  • Non-Solicitation – this prevents a recruiter from approaching (BD calls, e-mails etc) clients, customers, employees or suppliers of the previous firm with the intention of gaining business.  This is pretty common on most recruitment contracts.

 

Most recruitment contracts will have one or a mixture of the above types of clauses, but the reality is that they are incredibly hard to actually enforce.  In fact the court will assume one of these clauses is unenforceable and it is up to the aggrieved firm looking to restrain their previous employee that it is actually enforceable (I could have said prima facie unenforceable but decided to keep this well away from any scary Latin terminology).  So the key here is the test of enforceability and will help you make the smartest decision of how to handle yourself in your new role.

Your old firm will be able to enforce the restraining clause if:

  • They have a legitimate proprietary interest to protect – which basically means that they genuinely did a good deal of work with those clients and you approaching that client is going to prevent them from being able to continue doing work with them.
  • The clause is reasonable – this really is the main issue in most recruitment restraint disputes, more on this below.
  • The clause is no wider than is reasonably necessary for the protection of the legitimate proprietary interest – so if your old firm only recruits on Auckland’s North Shore but the clause prevents you approaching clients anywhere in the North Island then this goes beyond their proprietary interest.
  • The clause does not render the employee unemployable – a very interesting test on the enforceability of the clause, especially if the clause prevents you being able to operate in any capacity as a recruitment consultant.

 

The most common test of a recruiter’s restraint clause’s enforceability is whether it is reasonable.  So what is reasonable?  The primary factors to consider from most recruiter contracts I have seen are:

  • Temporal period – this is the period of time necessary for the threat of competition to subside.  Most contracts I have seen have either 3 or 6 months as the period during which you cannot deal with clients or solicit business from them.  The courts have stated that “more than 12 months is exceptional” although, quite incredibly, I have heard of one that was for 10 years!  The general consensus out there in recruitment is that 3 months is fair and would probably be enforceable if it got to court.  6 months is pushing it as it is unlikely it would take that long for a recruitment firm to find a replacement recruiter and for them to rebuild a relationship with the client.  As a recruiter, if your time period exceeds 6 months I would think you could feel confident that your clause was unenforceable.
  • Geographic area – if you recruit in Lower Hutt and the clause prevents you dealing with clients across New Zealand then this would probably be unenforceable.  In fact, if all of the clients were based in the Hutt Valley area then you could probably feel ok about recruiting for Wellington CBD clients, as well as anywhere else in New Zealand.  If the geographic area is too wide it will probably be unenforceable, unless you actually do recruit roles NZ-wide for clients spread all over NZ.  Note for employers – check your generic employment contracts for this, if you have staff in different office locations.  A Wellington recruiter recently joined a competitor and started working with her Wellington clients straight away.  Her old firm’s head office was in Auckland and the employment agreement had Auckland as the geographic coverage area.
  • Nature of the employee’s job – it makes sense that a more senior recruiter perhaps with national management responsibilities will have a wider reaching clause than a new-to-industry junior recruiter who is building a new desk in a small geographic area.
  • Consideration – something rarely included in recruitment contracts but probably a smart idea from an employer’s point of view, particularly for more senior appointments.  This basically means that part of your remuneration package is there to essentially justify the restraint clause.  So you might have a clause that prevents you soliciting business from clients for a whole two years after you leave the old firm.  Usually this would be unenforceable but if you have been paid an extra $20k/year as consideration of this wider-than-usual clause then it could actually be enforceable (and has actually been upheld in the courts in Condor Insurance v. Keans).

 

The final point to always bear in mind is that, under the Contracts Act, the court can reduce the severity or wideness of a restraining clause and still impose a lesser restraint.  If you have a clause that is way over the top and likely to be unenforceable, this doesn’t necessarily mean that you can happily start calling all your old clients for business the day after you have left the old firm.  Yes, it is much more likely that you will get away with it, especially as the more over-the-top a restraint clause is, the more likely a court will just throw it out, but they might just as well do something like reduce the period to 3 months, reduce the area to just Auckland North Shore, and still impose some kind of a restraint.

Hopefully this will be useful for some of you as a guide, which is all it is.  It has been a tough 18 months in recruitment and there are a lot more opportunities opening up, but I would also caution that the grass isn’t always greener and the opportunity to remain with the systems and routines and environment you know well and get your billings back up to speed could also be the best option to take.  But if you are sure that it is time for a fresh move, and there are an increasing number of you out there, then bear all of the above in mind.

Above all, be professional, ethical and courteous with your old employer.  No matter how you might feel after the tough times we have been through, they probably had it just as tough, and there is no sense burning bridges, especially if you’ll be needing a reference one day.  There should never really be a need for lawyers to take any money out of our recruitment industry and you should agree on boundaries with your old employer during your exit interview or before they march you off the premises for your garden leave!

Jonathan Rice

Jonathan Rice

MD at New Zealand rec-to-rec firm Rice Consulting and co-founder of on-demand recruiter offering Joyn. Recruitment agitator and frustrated idealist, father of two, husband of one, and lover of all things Arsenal and crafty beer.

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