Employee risk considerations for private capital investors

It is essential for investors to understand the multifaceted nature of employee activism and the potential risks it poses to their portfolio companies. By staying ahead of these developments, investors can mitigate risks and harness the potential benefits of a more engaged workforce.

Here we highlight potential employee risks for firms to have on their radar.

Employee competition: contractual protection for when key people leave

One of the paramount concerns for private capital investors is the management of key people, often referred to as "superstars," who are integral to the success of the business. The departure of such pivotal employees can have significant repercussions. To safeguard against this, businesses must ensure that employment contracts are meticulously crafted with robust protections. These protections should be tailored to the specific circumstances of the hire and should evolve with the employee's career trajectory within the business. 

• Establish the right balance in employment contracts, particularly regarding non-compete and non-solicitation clauses. The enforceability of these provisions can vary significantly based on jurisdiction and the specific wording used. Carefully assess the competitiveness and potential for litigation that these restrictions may entail.
• Utilise other options, such as longer notice periods and tightening confidentiality wording.
• Consider what the employee might do with disclosure of confidential information. The receiving employer must make it clear that confidential information must not be brought across to the new firm.
• Think of all employee contracts as live documents. As people progress through an organisation and move through employment cycles, enforcements in contracts need to protect and reflect what the person is doing at the time.
• Effective communication between HR, legal, and other relevant departments is vital to ensure that contractual updates and enforcement actions are consistent and comprehensive, and nothing slips through the cracks.
• Non-compete restrictions should be financially compensated (distinct from salary and stock awards) and limited in time and space. Usually, non-compete clauses protect the employer’s interests only and it is rare to find one that covers the entire portfolio of the private capital firm – if one does exist, this will not stand in the EU/France. A global approach to non-compete clauses will rarely work.

Managing employee risk across your portfolio

Recent events have underscored the potential for employee-related issues to disrupt business operations and even threaten the viability of a company. We’ve identified the top three issues we think investors need to have on their watchlist.

Whistleblowing

Governance around whistleblowing is becoming increasingly important as most issues which are made public are the result of poor governance and not dealing effectively with the disclosure. It should be noted that reporting system requirements and whistleblower protection have now been harmonised throughout the EU since the 2019 Directive (except Poland and Estonia).

In the UK, the FCA has been focused on whistleblowing for some time as it takes the view that an environment where employees feel safe to share ideas and speak up where they have concerns results in more productive and innovative businesses. It also reduces the potential for inappropriate risk taking or behaviour which can result in harm to consumers and markets. When issues are raised in portfolio companies, they should always be treated seriously. If not, whistleblowers may feel compelled to escalate their concerns to the private capital investors.

It is important to note that today, many issues surface or are made public this way. Whistleblowing is also often, at least in France, used as a tool or bargaining chip in the case of an exit from an organisation, including from senior executives who argue to be whistleblowers on antitrust issues, tax evasion, harassment, discrimination, etc.

DE&I

The increasing prominence of employee activism, driven in part by the significant impacts of movements such as #Metoo and #Blacklivesmatter have brought issues like discrimination and harassment to the forefront in workplaces across all sectors. The movements have not only raised awareness but have also led to a surge in reports of such misconduct. 

Management can take a leading role here by adopting a robust communications strategy to address these concerns. They should send a clear and unequivocal message that discrimination and harassment will not be tolerated. We strongly encourage firms to take proactive steps to enhance awareness and training programmes.

The EU Equal Pay Directive is more expansive than the UK Pay Directive, which is applicable only for companies with more than 250 employees. There is a requirement to publish the gender pay gap annually. Implementation of this Directive will require heavy involvement on the part of HR and legal departments to help navigate different jurisdictions. Given that sanctions are likely to be more severe and obligations more onerous, employers will certainly need to develop their compliance functions. In addition, this will involve a great deal of upstream thinking, involving HR, legal, compensation and benefits teams, compliance and so on. 

Pay disputes

Consider the importance of having very clear pay brackets. We’ve been seeing expert evaluators and independent assessors scrutinising pay structures across a variety of sectors. Where pay structures are transparent, there is less chance of firms losing control of their remuneration policies as a result of external intervention.

Horizon scanning: New Government? New Rules?

The UK Labour Party has set out its stall as to the employment law reforms it would like to make if it gets into power. The potential impact of these proposed legal reforms is significant should a Labour government be elected. Although there is very little detail at this stage, the proposals include:

• Bolstering workers and collective rights and the dismantling of the gig economy model, making it more akin to the European model, but giving unions and employee representative bodies more influence. The impact of these law reforms could deter hiring in the UK, as the current regulation is much softer.
• Unfair dismissal as a day one right with no cap.
• Workspace inspections for complaints of discrimination.
• Proposals for new pay reporting.
• The suggestion of a regulatory body review on how an employer is monitoring health & safety, DE&I and a fair wage remains unannounced/is pending.