Employment and pensions

How to lock-in value post-lockdown

Published on 6th Jul 2021

Will there be a post-lockdown surge of employee departures in recruitment and workforce solutions companies, and what ten steps could help minimise loss of corporate value?

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As recruitment consultants prepare to return to the office following 15 months of isolation and uncertainty, many will seek a fresh start and new challenges by moving to join competitors or start their own businesses. The recruitment industry sees a high rate of employee turnover at the best of times , but this is now likely to be at a higher level than before.

Recent surveys about employee sentiment after more than a year in and out of lockdowns have found that many have learned to work independently and have thought hard about "what they want in life", while new tech has made working independently easier. The experience of previous job market recoveries all point in one direction: many businesses face a potentially large wave of new competition from recent ex-employees.

Risk of "loss of key talent" has always made private equity and other investors nervous –they do a lot of due diligence on this risk and the steps companies have taken to minimise it. This can be even more problematic where senior employees or directors try to divert business away from the company to competing enterprises or orchestrate team moves. While the senior management may be subject to greater duties to the company, the damage that they can cause can be more significant.

Loyalty and incentives

This is all likely to lead to redoubling of efforts to build loyalty whether with incentive schemes or more informal exercises. However, it seems a historical certainty that there will be a surge in litigation as businesses attempt to enforce their restrictive covenants against former employees who are soliciting clients or candidates or poaching key staff. There was a significant increase in this type of litigation in the recruitment sector after the financial crisis back in 2007 and 2008 – with the hallmarks of a similar trend today already beginning to emerge.

However, this time, recruitment businesses are at another disadvantage. It is no longer obvious when an employee starts to act suspiciously. Gone are the days when questions are raised because an employee starts to take calls in private, pops out for a long meeting in their smartest suit or views client files with an unexplainable regularity. Instead, employees are at home, conducting zoom interviews with competitors, photographing business sensitive information with their personal iPhones and speaking to clients about their future plans without their current employer's knowledge.

Ten steps to consider

Businesses can take steps to protect their assets and now is the time to do it address the risk.

1. Restrictive covenants – are they fit for purpose? Remember, covenants are extremely hard to enforce and they need to be tailored to the individual employee. Courts do not rewrite covenants but will strike them out if they are considered to go further than necessary, leaving businesses without protection. It is vitally important to ensure that covenants have regular health checks to ensure they are in line with current legal requirements. And, for those looking at introducing a new incentive scheme, it is also the best time to introduce new covenants (you can't just "issue" them without offering something in return).

2. Confidentiality provisions – are they adequate, and should you be imposing regular obligations on senior management?

3. Is a paper trail in place? It is important that not only do employees explicitly agree to comply with their covenants, but they are also regularly reminded of the terms – such as on promotions or pay rise. When an employee leaves the business, they should receive a letter that very clearly sets out their post-employment obligations. Do you have service contracts with all senior management and key employees? Remember, these employees are likely subject to greater duties to the company than "regular" employees.

4. Data protection policies – have you updated your data protection policy to protect your data in remote working environments? In hybrid working environments in which employees can choose where they work, the risk of data breach is ramped up and steps are needed to mitigate against this heightened risk.

5. Do you have an up to date social networking policy? Has the business taken steps to assert "ownership" over certain contacts?

6. Key client relationships – do you have multiple account managers for key clients? Will doing that require new commission schemes?

7. How embedded are you with key clients? Are there tech-enabled client-tailored support systems with clients which a start-up or competitor would find hard to replicate? Do you have you got exclusive or non-compete deals with software providers?

8. Are your key employees tied in? Financial retention packages or share options are an invaluable tool for retaining key talent. For many businesses, this is a good time to introduce share schemes because the last year will have made the share valuation aspect of this favourable.

9. Can you attract and retain key talent? Is hybrid working an option? Are the pay and benefits offered market standard?

10. Are you monitoring your workforce? Do you have alerts that are triggered if certain information is copied or accessed frequently, and can you get a record of what has been copied or accessed? Have you "seeded" your client database?

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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