October 30, 2020
Employers and business owners will understandably want to protect themselves as much as possible when an employee leaves the business. An employee may have built up a strong customer base or client following during their period of employment.
They may also be party to commercially sensitive information such as pricing or design processes. If they do leave to join a competitor, it is natural for an employer to seek to prevent or limit the financial damage that this could cause. Restrictive covenants provide a means of protecting the employer in these circumstances. There are a number of factors that should be considered when drafting and enforcing restrictive covenants.
Who should be covered?
Your covenants should be used to protect legitimate business risk. The legal starting points is based on the general principle that restrictive covenants represent a restraint of trade and are therefore unenforceable. When drafting the covenants, it is therefore important that any restriction are proportionate and do not go any further than is necessary.
With this in mind, restrictive covenants are more likely to be enforceable against employees who could inflict the most damage to your business. This would usually include more senior employees and those employees in a more customer facing role such as a sales person or business development manager. There is nothing to prevent an employer from including a restrictive covenant clause in a contract for a junior employee. The courts may however deem this to be excessive and disproportionate. This will however depend on the facts of each case. Employers should take care when taking a blanket approach of including restrictive covenants in all of their employment contracts.
What types of restrictions should be included?
The most common forms of restrictive covenants include non-solicitation and non-dealing clauses. These are put in place to prevent former employees approaching or acting for clients or customers through their new role. Non-poaching clauses are also quite common in circumstances where an employer wants to prevent a departing employee from taking other employees with them.
Employers may also want to include a clause which prevents an employee from working for a competitor. As a word of caution for employers, these types of clauses can be difficult to enforce. The courts may often be reluctant to enforce these clauses on the basis that it prevents the employee from earning a livelihood elsewhere. These types of clauses should therefore be proportionate by allowing the employee some degree of freedom in terms of obtaining employment elsewhere. This increases the chances of the clause being enforceable. As an example, employers may insert a geographical restriction by preventing the employee from working within a 10 mile radius of their current employer. Another approach may to specifically list the competitor organisations or at least provide a definition of a competitor.
How long should the covenants last?
This will depend on a number of factors, such the nature of the employee’s role and the industry they are working in. Restrictive covenants are most commonly put in place for a period of 6 months. Each situation will be different and whether a 6 month restriction is enforceable will depend on the facts of the case. Where an employer seeks to lengthen the restrictive period to 12 or even 24 months then they should have a good business case for doing so. For instance it may be that customer contracts last for a period of 12 months. This could potentially justify the employer extending the covenants to 12 months to tie in with this period.
What action can you take?
If an employee has acted in breach of their restrictive covenants, there are two courses of action you could take. The most common and obvious course of action would be to sue the employee for any damages caused as a result of the breach. Secondly, employers may wish to seek an injunction against the employee to prevent the employee from working for their new or prospective employer. In some circumstances, employers may consider taking both courses of action.
Are restrictive covenants worthwhile enforcing?
The reality is that employers and employees will not want to engage in litigation. This is likely to prove costly and stressful. Employers are therefore understandably reluctant to go through the formal court process in order to enforce the covenant. This would usually only apply if there is a compelling business cases to do so (i.e. the employer has or is likely to suffer a heavy financial loss).
This does not mean that restrictive covenants are not worthwhile putting in place. On the contrary, a well drafted set of restrictive covenants can act as a useful deterrent for employers who are looking to protect their organisation. This not only makes it less likely that employees will act in breach but also puts the employer in a much stronger if they do have to go down the litigation route.
For any queries about restrictive covenants, feel free to speak to one of our Employment Solicitors today. We have substantial experience in advising our clients on any issues arising from restrictive covenants.