My client poached my software developers – what can I do?

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Imagine this – it’s taken you almost a decade, you’ve created a successful software development business with many happy long-term clients, a stable team and a great reputation.  More recently you’ve even created a funky new millennial style brand!  One day an employee resigns and the next week another one resigns.   The following week your biggest client breaks their long-term engagement with you and then another one of your team resigns!   You get suspicious, do some investigations and discover the former employees are working in-house for your ex-client!

It is not uncommon for clients (Clients) of professional service businesses (Service Provider) to poach the employees of the Service Provider.  The software development sector is a prime example where this occurs.

For professional Service Providers, employees can be the most important assets.  Very often, Clients will go ahead and poach employees as they figure that it is cheaper to employ someone than pay a premium to for the same services.  Of course it’s the Service Provider that has gone to the time and expense of training their people, and therefore it is important to take steps to actively protect your business from Clients poaching your team members.

This article sets out the contractual protections that service providers can include in their Client and employment agreements and their relative utility of each in protecting their investment

Client agreement

For software developers the contracts that they ask Clients to sign range from the bottom of a proposal to a complete contract set that has been negotiated between the party’s lawyers.  In this instance we refer this range of documents as the client agreement (Client Agreement).  It is more common for employment contracts to include restraints prohibiting employees from working for clients than it is for such clauses to be client service agreements.

Non-solicitation of employees

Prohibitions against poaching staff in Client Agreements are prima facie enforceable.  The recent New South Wales Supreme Court case of Quantum Service and Logistics Pty Ltd v Schenker Australia Pty Ltd [2019] NSWSC 2 showed this, where the Court granted an interlocutory injunction to prevent a client (Schneker) from employing a manager who was formerly employed by the service provider (Quantum).

Interestingly, there was no post-employment restraint in the manager’s employment contract with Quantum.  Therefore it had to rely on the non-solicitation clause in the Client Contract.  The clause in question stated:

“13.13.  Solicitation for Employment.  The parties agree that neither party and their associated entities, sub-contractors or their employees will employ or approach for employment, the employees or ex-employees of the other party, during the term and until a minimum period of six (6) months following the termination of this agreement.“

The Court granted the injunction, on the condition that the manager was offered to be re-employed by Quantum, albeit at $22,000 less per annum.  Therefore, the employee, who was not restrained by an enforceable restraint of trade clause could not go and work for Scheneker.

The case highlights how far Courts will go to uphold the rights of companies to protect their legitimate commercial interests over the interests of employees.

Confidential information

Depending on the nature of the work performed by the Service Provider it may also be possible to draft enforceable clauses relating to the use of confidential information that could apply to limit the risk of employee solicitation.

Copyright

In the same way that an express obligation of confidence could be used to protect the Service Provider against solicitation and loss of their employees, title to copyright can be withheld until all outstanding fees and charges are paid.  In many cases involving the solicitation of employees the Service Provider is owed money by the Client.  Depending on the circumstance its possible for clauses to be drafted to have the effect of minimising the risk that the employees will be poached because of the presence of this sort of clause.  That said this will depend on the services provided and the precise nature of the copyright involved.

Practical considerations

Do you ever wonder why (in some cases) Service Providers attempt to limit Client access to their skilled employees?  Practically this may mean not providing access to the employee’s full name or having tickets in job management systems addressed by a pool of people and not one particular individual.   Regardless of the situation, there are practical steps that can be taken to limit the opportunity for solicitation by Clients.  Each case is different,

Service Provider’s employment contracts

The more common way of attempting to prevent employees from working for clients is through a restraint of trade clause in the respective employment contract.  That said the Courts only enforce them to the extent necessary to protect the employer’s legitimate interests.  The reason being is that, as a matter of public policy, the law does not want to restrict a person’s ability to earn a living.  In making such an assessment the Court will consider whether the restraint is reasonable with regard to:

• the geographic area of the restraint, and its length of time;
• the types of activities sought to be restrained; and
• whether the restraint reasonably protects the employer’s legitimate business interests.

If an employee works for a Client in breach of the restraint, the employer may seek to injunct the employee from doing so.

The case of AECI Australia Pty Ltd v Convey [2020] QSC 207 is an example of the issues that can arise when an employment contract is terminated.  In that case, AECI Australia Pty Ltd ACN 165 704 870 (AECI) had employed Mr Nigel Convey (Convey) in senior managerial positions since 2014.  In March 2020, Convey resigned to take up employment at Incitec Pivot Ltd ACN 004 080 264 (IPL).  AECI sought a declaration that the employment agreement was binding and enforceable on Convey, and accordingly that he should be restrained from any conduct under the restraint of trade clause.

In considering the drafting of the clause, the related entities and the restraint area, the Court said the restraint “extended well beyond the sphere of AECI’s competition and its interest in the misuse of its confidential information”. On that basis, the validity and enforceability of the restraints was not supported, and therefore the application for interlocutory relief was dismissed.

Injunctions

The first course of action to enforce the restraint provision is to contact the former employee and ask them to cease working for the Client.  Of course the Client will not be happy about this and may never use the Service Provider’s services ever again!

If the former employee does not cease working for the Client, a letter of demand from the Service Provider’s lawyer should be sent to remind them of their post-employment obligations.  This letter will be used as evidence that they were put on notice of their obligations and that they also ignored the demands (if in fact that they did).

If these two (2) approaches do not work, the former employer could make an application for an injunction to restrain the former employee from continuing to breach their contract, pending a final hearing of the matter by the Court.

Most application do not proceed past the interim stage, as it is common for the parties to reach a settlement prior to the hearing of the matter.

Takeaways

Client Agreements need to be carefully drafted to include clauses that protect the Service Provider’s employees from solicitation by Clients.  The Service Provider’s employment contracts need more care to ensure that any restraint is reasonable to protect the legitimate commercial interests and are not too broad.   In both cases to address the damage caused by Client’s solicitating employees appropriate contractual and physical measures need to be put in place prior to the respective relationships commencing.

Links and further references

Cases

AECI Australia Pty Ltd v Convey [2020] QSC 207
Quantum Service and Logistics Pty Ltd v Schenker Australia Pty Ltd [2019] NSWSC 2

Further information about asset protection

If you need advice on restraint of protecting your greatest asset from being poached by your clients, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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