Group Structure Protects Against Employee Breach

Employees of a company which is a member of a group are normally contracted only to the company which employs them directly. A recent breach of contract case looked at the question of whether the holding company of a group could make a claim against ex-employees who had a ‘non-competition’ clause in their contracts of employment. The employees in this case worked for the holding company of a financial services group. Their contracts prohibited them from supplying financial services advice to any clients of their employer (the holding company) for a year after they left its employment. They left the company’s employment and solicited business from and supplied financial services advice to clients of the group.

Their former employer sued. The reasonableness of the non-competition clause was not contested. What was contested was whether it was applicable, since the holding company by which they had been employed did not itself supply financial services advice. The holding company merely managed the affairs of the other group companies. The business of the group – the supply of financial services advice – was carried out by subsidiary companies. The argument of the employees was that they had not breached their agreements since the holding company did not supply clients with financial services advice.

The Court of Appeal did not agree with the employees. In the view of the Court, the reality of modern business is that group structures are common. The non-competition clause existed to protect the legitimate business interests of the group and was enforceable. It would be senseless to create such clauses in contracts if there was nothing which could be protected by them.

It is worth noting that the employees were familiar with the group structure and the roles of the companies within the group, having been employed by the holding company for several years. However, it is likely that the employer would have been successful even if this had not been the case.