Back to school…but is it time for a change?
In order for restrictive covenants to be enforceable, an employer must be able to demonstrate that those covenants go no further than is reasonably necessary to protect their legitimate business interests, namely their confidential information, client relationships and employees. The courts will balance an employee’s right to work wherever, whenever and for whomever s/he pleases against an employer’s right to protect these interests. What are you hoping to achieve by restricting an employee’s activities once they have left your company? Is it to seek to avoid your employee being in a position to compete with you, or is it the preservation of key client relationships, confidential information, trade secrets or the stability of your workforce? Identifying this rationale from the outset is important both in terms of drafting the covenants and enabling you to rebut any allegations that they go further than is reasonably necessary in the circumstances.
For how long is it reasonable to keep an employee out of work in order to protect your client relationships or confidential information? It is dangerous to assume that the longer a restrictive covenant bites, the stronger it is. This simply is not the case and if a covenant is regarded as too long, it will be unenforceable. Are worldwide covenants appropriate or are you seeking to protect certain interests in a particular region or market? Even covenants which are limited to a specific area (such as the UK) may be regarded as too wide to be enforceable, so exercise caution. Further, what is appropriate for your industry? If you operate in a sector which is constantly evolving (such as technology or communications), shorter covenants may be more suitable than those required for a slower growth sector (such as insurance).
Consider an employee's responsibilities, seniority, skills and experience, as well as their relationships with third parties (such as suppliers, manufacturers, distributors, and clients) and any specialist knowledge that they may have. Draft any restrictive covenants with one eye on the role of the individual whose activities are being restricted (are they a junior employee, a senior executive, a director?) and the other eye on the size, market and scope of your organisation. If the covenants are not properly tailored to suit the particular role of the individual and your organisation at the time they are entered into, it is likely that they will be regarded as too wide to be enforceable.
It is not enough to prohibit an employee from dealing with or soliciting clients of “the Company” if, in fact, the client contacts or relationships which an employer is seeking to protect belong to a different entity, such as a trading or subsidiary company within the group. There are no catch-all definitions, so think carefully about defined terms such as “Restricted Business”, “Competitive Services” and “Restricted Period” as well as seemingly innocuous phrases such as “any relevant Group Company”. Also consider the extent to which any defined terms such as “Restricted Client”, “Prospective Client” or “Restricted Party” extend to contacts through online networking sites such as LinkedIn, Facebook and Twitter. Social media is making it increasingly difficult to distinguish between those contacts which are genuinely “business” related (and therefore arguably “Company Property”) and those which are “social” (and more likely to belong to the employee). This is a developing area of law so seek legal advice.
Very commonly overlooked, but when an employee is promoted, the restrictive covenants in his/her contract of employment may need to be revised in order to:
If revised restrictive covenants are incorporated into an individual’s contract of employment, the employer will need to provide adequate consideration for the employee entering into those new covenants.
Adequate consideration could constitute anything from a pay rise upon salary review or promotion to flexible working, the award of a bonus, or the offering of shares (amongst other benefits). Employees are most likely to cooperate at the point of promotion.
This will afford you the opportunity, as the individual’s current employer, to assess whether you would like to make the employee a counter offer (if s/he is considering leaving your employment) before it is too late and/or guard against possible poaching or team moves by actively managing your workforce. It is also worth including an obligation in an employee’s contract which provides that if the individual learns of any approach or offer received by or made to another employee or officer of the company, s/he must immediately notify you of the same.
Depending upon the circumstances, in the event of a breach of these covenants you may be able to sue the prospective employer for damages for inducing that breach (as well as the employee directly). You could also seek an injunction preventing the parties from working with each other. Given that the prospective employer’s pockets are likely to be deeper than the employee’s, this may increase your potential to recover any loss you can prove you suffered as a result of the breach.
Employers often run into problems when they pay an employee in lieu of their notice period or put them on garden leave where there is no express contractual right entitling them to do so. If an employer breaches an employee’s contract of employment in this way, the employee is entitled either to waive that breach (in which case the contract continues to bind the parties) or accept it as a repudiation of contract. If the latter, the employee is entitled to treat his/her employment as terminated and regard him/herself as released from his/her restrictive covenants. Be sure, therefore, to include suitable provisions in the employee’s contract to guard against this, rather than in your staff handbook. This will afford you maximum flexibility to terminate the individual’s employment without any breach. If any termination provisions are included in your staff handbook, ensure that these sections are clearly described as “contractual”. There may be tax implications if you include an express clause in your contracts which provides you with the option to terminate an individual’s contract by making them a payment in lieu of notice. If this is a concern, discuss this with your employment lawyers.
The court will in all likelihood take into account the duration of any period of garden leave the employee is required to sit out immediately before termination, when assessing the enforceability of any restrictive covenants (normally, the employee’s notice period or part of that notice period).
Whilst it may seem costly and/or time consuming to have to sit down with your legal team and work out the restrictive covenants which are applicable to your business, doing so could prove invaluable if you subsequently find yourself in the unfortunate position of having to take steps to enforce them. It may seem easier and cheaper in the short-term to copy and paste restrictive covenants from one employee’s contract into that of a new joiner, or rely on the restrictive covenants your business has used previously, but this is risky and highly inadvisable. Case law in this area is developing and the courts’ attitudes towards post-termination obligations are in an almost constant state of flux. You need to think very carefully about what interests you are trying to protect and why, and draft your restrictive covenants accordingly, having sought sound legal advice in respect of the same.
Should you have any further questions, please contact a member of our employment team.
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